May 25, 2020: JCPenney in talks with Amazon, the fate of small business, and the future in-store experience.

No time for news? We’ve got you covered. Welcome to the Retail Rundown, your go-to weekly podcast where RETHINK Retail teams up with industry experts to deliver the top trending news stories in retail.

– – – – – –

Hosted by Julia Raymond

Written and produced by Gabriella Bock

Edited by Trenton Waller

 

TRANSCRIPTION

Julia Raymond:
Today, we’re joined by guests, David Lemley and Shilpa Rao. David is the president and chief strategist of Retail Voodoo, where he has worked with top brands like Tropicana, Pampers, Starbucks, Sears, and Nintendo. Shilpa is the head of AI powered strategic initiatives at Tata Consultancy Services, where she has driven multibillion-dollar uplift in sales and margin for leading global fortune 500 companies in merchandising and supply chain. David, Shilpa, thank you both for joining the show today.

Shilpa Rao:
Thank you for having us.

David Lemley:
Yeah. Very excited to be here, thank you.

Julia Raymond:
I’m excited for you guys to join. The first bit of news we’ll go over is the American department store. And the latest slogan they had is, “When it fits, you feel it.” If you guess JCPenney, you would be correct. It’s making huge headlines this month, as it’s now filing for bankruptcy after four consecutive years of sales decline. Just last week, Penney’s outlined its plan to return from bankruptcy as a sustainable and financially sound business for the longterm, which includes closing nearly 30% of its stores and spinning off its real estate as a separate publicly traded investment trust.

Julia Raymond:
Penney said in a release that other action items will include reestablishing the fundamentals of retail, reenvisioning its merchandise offerings, and rolling out new innovations. Multiple sources are reporting that Amazon has been in talks with the 118-year old retailer, and maybe interested in a possible acquisition. Those reports, however, have yet to be confirmed by Amazon. Retail consultant Steve Dennis wrote an article in Forbes last week, stating, “The key to JCPenney’s survival isn’t closing stores. It’s becoming relevant.” Shilpa, do you agree that part of Penney’s decline is attached to the notion that the brand just no longer to appeals to today’s customers? Or is it something else?

Shilpa Rao:
Sure. When you look at fashion or apparel retail, what happens is, that if you don’t get a season right, you are remaining with a lot of inventory that you need to get rid of. And when you don’t get a couple of seasons right, and then this inventory just piles up. And you’re open-to-buy has shrink so much that you don’t have enough budget to take risk and do a lot of innovation and try out things. That’s where the problem lies. Once in a couple of seasons, which have gone not so well for JCPenney, their entire focus moved on, how do I get rid of that inventory? And then, the focus of merchandising went on, on how do I open up my open-to-buy? It is kind of a vicious cycle, which tends to happen to many apparel and fashion kind of retailers. And I think that’s where the problems start.

Shilpa Rao:
And also, the limited investment of both in time and technology and others in terms of understanding the customer and then imbibing those insights into your merchandising processes. Right from anyone starting at the concept level in your concept to trade cycle. If you don’t get what is the probability of that particular merchandise being successful down to store item level or a style skew level, it becomes so very difficult to identify what’s going wrong, where is it not working? So to this point, I agree that there is a perception where JCPenney is being seen as a retailer, which is not really getting the customer right, specifically for the price-sensitive and like a middle-aged and older women segment, and they have focused more on the millennials. So, getting that mix right is essential and that’s where some of these challenges are coming from. David, what are your thoughts on this?

David Lemley:
Well, I agree with so much of what you’ve said. I think that JCPenney’s problems began before 2012, before Ron Johnson, the CEO from Apple coming in to reinvent JCPenney. I think that they were already in trouble from a lack of investment and a lack of understanding of the customer. And frankly, an unwillingness to invest in customer experience at the store level, from employee training, to lighting, to merchandising mix. And I think that they have end up in saying, “JCPenney is going to go out of business or may not recover for a decade now.” And so, I think it comes down to exactly what you’re saying, but it’s an ideology. I think that they, as an organization, do not want to invest in deeply understanding their customer and creating an experience that would be relevant to them. And they’ve opened the door for places like, AmazonBasics and for Walmart fashion and every other person or a retailer that could provide a discount, fast fashion alternative, is now much more relevant. And I think it will be difficult for them to get it back.

Julia Raymond:
It sounds like David, you and Shilpa are on the same page a little bit. Their lack of investment and innovation, and Shilpa said, their inventory dried up and they experienced some shrink and they had no budget really to invest. And they probably, lacked that. And David, you said the same thing, lack of investment in understanding the customer and really innovating on that experience in-store.

Julia Raymond:
There was an interesting post on LinkedIn. It was trending from CNBC retail reporter, Lauren Thomas. Don Gregor on LinkedIn, commented, and he basically said that, JCPenney’s investors are using the real estate investment trust to basically cash out twice. What do you guys think about that?

Shilpa Rao:
Sure. They have a good investment in real estate. I think about 300 old stores have a good locality, which are their own locations, out of about 800 plus locations that they have. And I think they have also invested very well from a facility and a fulfillment center perspective. From that perspective, they have those assets which they can fall back on when they are in times of trouble. Now it is the matter of how do you reinvest that into the business or into things which matter, because there are two major parts that they need to focus on.

Shilpa Rao:
One is on the customer experience side, getting it right. And as David also mentioned, these small things, including the lighting in the store, the whole experience, what the customer goes through in the store. And given the current time, again, we have to really evaluate the relevance of stores during these times. How they invest wisely in that, becomes relevant. And then second, on the merchandising and the online strategy. How do you focus on the innovation, getting to the right segment and right customer becomes important. So I would say that, they have a lot of assets, which they can probably cash out and reinvest in their core business.

Julia Raymond:
Okay. You sound like you have a bit more of a positive outlook that it might turn around a little bit for them.

Shilpa Rao:
Sure. They need more funding and investment to get a lot of the things that they are planned to, to just execute.

Julia Raymond:
And David, did you want to add anything on that topic?

David Lemley:
Before we go to the Amazon thing, the thing that I would talk about is, I did work with Sears before their debacle, after Eddie Lampert purchased it. And what I think the JCPenney real estate play is lifting from that playbook. They are, in fact, looking to, “Cash out twice.” And I don’t know if the money will go back to making the brand survive and thrive. I think it’s more of a, let’s ride this out and see what happens philosophy.

Julia Raymond:
And what would you say about the rumors, about Amazon potentially purchasing some of Penney’s real estate?

David Lemley:
I think it would be a brilliant move by Amazon to acquire some of their locations, and AmazonBasics and Amazon Home and Amazon wildly Prime could chop up the space and make Amazon Go-style retail, normalized across things other than food.

Julia Raymond:
Amazon Go retail. You said normalized across other things than just food, which they’ve tested already. Shilpa, do you think this is realistic? Do you think we might see Amazon stores popping up in the near future, even with the pandemic?

Shilpa Rao:
Amazon has a very interesting play on the apparel side. I mean, when they started off, they didn’t really get the apparel. So, you wouldn’t go to an Amazon to buy fashion. But now with them launching about 100 plus brands. Still that private-label play is something that truly needs to be fixed. So, I would recommend with just 10 real estate, if they could even buy the entire know-how and the knowledge and what comes from a JCPenney perspective, that would be more beneficial for them in cases of building that capability, building that network and building that ability to really have the merchandise which is relevant. And Amazon brings, with the power of customer insights and the power of delivery and others, which could make a powerful combination if they want to strengthen their fashion or apparel capabilities.

Julia Raymond:
And they certainly have the capital to test it, even though I know their bottom line, in recent months, hasn’t been great according to their recent investor discussion. But moving on, I think we covered JCPenney pretty well there. Thank you both for your thoughts regarding what’s going on with the bankruptcy and the rumors. The next thing I want to jump to is the store experience, because stores are reopening. Customers are returning back to their favorite stores to shop for clothing and other non-essential products. We see retailers like Nordstrom, Best Buy, Macy’s, Kohl’s, and Gap stores, including Banana Republic and Athletica, among retailers that started to welcome back customers and phase roll-outs.

Julia Raymond:
And the experience will be different. There are limited fitting rooms with some retailers such as Gap, they’re closing fitting rooms altogether. Nordstrom will have a handful of available fitting rooms, which they sanitize after every guest and unpurchased merchandise will be quarantined before returning to the sales floor. Retailers are also shifting to contactless payment options and will not accept cash, especially Nordstrom specifically. And at Ulta, Macy’s and Nordstrom, their styling services are limited. Beauty products are not available for testing in store. And if we look over to the UK prime minister, Boris Johnson, said that depending on the rate of the coronavirus infection among the population, shops could start opening in England on June 1st. David, I’ll pass this to you. How long do you think these precautions will last? Do you think they’ll hinder the in-store experience for customers?

David Lemley:
I do think they will last at a minimum through the remainder of 2020. I think there’s just not enough information in place not having a care for the virus or having that covered off in all of the news media and the concern around the potential of increased cases in the fall. I think that has people a little skittish. That said, I do think people are wanting to go back out and experiment. So, I do think that there will be some traction and some trial, but I predict that because of the social distancing and the limited things, that it’s going to feel really different and the retailers that get it right, have been able to create some sort of magical experience. And then the rest will struggle to keep up.

Julia Raymond:
You said that at least through the end of 2020, and yes, it will hinder the experience and some will stand out versus others. Shilpa, what’s your take?

Shilpa Rao:
Sure. From a pandemic perspective, I mean, everybody’s guessing until the vaccine comes. It was something which is going to stay, and then we need to find various ways to distant ourselves physically, or looking at wearing masks or other things. So having said that, the experience in the store will be definitely, completely different just as what the store opens. Obviously, there will be a big search in just buying, especially from a fashion and an apparel perspective. I mean, personally, I’ve been also like, just wearing a new dress would be just so much refreshing and rejuvenating. So, we would see definitely that kind of search, but then again, as you rightly said, you don’t want to try on something with somebody else’s tried on and you get little skeptical. And if you have seen somebody closely going through the disease, then you really care and you’re really scared about it.

Shilpa Rao:
So having said that, I think there will be a surge in online, and retailers need to identify ways on how they will manage the returns. And there are ways in which retailers can really change that experience. There are technologies which have been under test with many retailers, but they have not been thoroughly adopted at a huge scale because there was never such a pressure to do that. And everybody thought that apparel always looks, feel, and touch, feel and others. But having said that today, even on the sourcing side, when the buyers are actually communicating with their vendors, because of the whole travel restriction and everything happening in a different way. But they are doing this through video calls, they are doing this through 3D software, which can emulate how it would fit on somebody.

Shilpa Rao:
There are already models that are available, which take into account, like over 56 measuring points in a body. So, you could know how a particular cloth would fit in, for a particular piece of apparel would fit and how it would fall based on the cloth that you have, and then the composition in terms of polyester vs cotton. I think it is just about time when this gets extended to the customer where you do a virtual try on, which is not just like pasting clothes on you, but it would actually tell, will it fit on you and based on your changing profile. I mean, we’ve been all eating a lot during the span of weeks.

Julia Raymond:
I like that you brought that up Shilpa, because Shoptalk, just last week, had a virtual conference for retailers and they did a live poll and actually AR, augmented reality, for product testing was something over 1 in 10 retailers said that they’re considering investing in. But I know the technology has been somewhat far out. David, are you saying the same thing from your retail clients that Shilpa’s mentioning.

David Lemley:
It’s a very interesting topic. I think that people are working hard to try to figure it out. And those who are poised to invest are going to do better. It makes me have a question for sure though, which is related to predicting what might happen in fashion. Do you believe, based on fitting via augmented reality and the… I think it was 56 points on the body that fashion designers will be inspired to change the way clothing fits and how it drapes in order to accommodate a much less articulates trying on experience.

Shilpa Rao:
Absolutely. I mean, again, depending on how long it takes to kind of just get things back to normal or new normal, the trends in which the people would exhibit would also change. Like for example, how would the going out or the eating out would change. And if most people are going to work from home, they would need more of their PJs than elegant dress. So, it depends on how this pans out. And because now it is most people locked at home, they’re getting more used to more comfortable clothing. So I think at least, now we see a trend on having more comfort clothing. And that brings in saying that, having more generic fits rather than tightly fitted and to the shape fitted kind of feel.

Shilpa Rao:
Yes, there will be… I mean, designers could definitely take on that. The other thing, just to add to it, from a styling perspective, because finally what fits is what gets done. I mean, it fits when it’s styled well. Even you can have an article of loose clothing, a piece of clothing which will really look very stylish and just augment your shape. I think this will also see a rise on more of the personal stylist and these are opportunities for stores to have more of these on a video con basis and others. So, we could see an emergence of a new profession, or even having more one-on-one styling session. Because today, even during the lockdown, we’d seen a lot of models getting shot to work remotely. So, what stops from getting a personal stylist suggesting on how you could drape the dress or how you could use the accessories to make a generic, not so fitted dress, fit you and make it look good.

Julia Raymond:
Great points, Shilpa and David. I really like the positive outlook, that this could even open new job opportunities for retailers who might be hiring more stylists to host those virtual clienteling opportunities. The third topic we’ll jump into is about small business, because we know small business has especially been impacted during this pandemic and even more so for retailers who are in the small business arena. And a new survey was conducted by Facebook, and it found that one in three small businesses shut down due to COVID-19 and they don’t expect to reopen, so that’s pretty significant.

Julia Raymond:
And those findings were echoed by CNBC’s Jim Cramer. When he said last week that governments forcing some retailers to close and others to stay open, has damaged smaller businesses for the longterm. His comments came on the heels of Walmart’s first quarterly earnings reports, which showed its online sales rose 74% year over year, so that’s huge. And same-store sales increased by 10%. He said, “If you were Walmart, the thing you would most want to do is have the government shut down your competition, and that happened.” And that was on a Squawk Box. Shilpa, do you agree with Cramer when he says that the government has unfairly hurt smaller competitors?

Shilpa Rao:
I would say every government has its own set of things to take care of. And what we’ve seen is from one perspective I would say, is how do they manage and limit the spread of the virus. When you are a Walmart, you have the muscle and the power to incorporate all or enough safety measures within the store, which a small business may or may not have. And again, it depends on like, for example, Walmart can easily create one-way aisle or have people clean up the aisles multiple times a day and incorporate a lot of those safety measures where the store associates are protected and others.

Shilpa Rao:
But from a small business perspective or a small retail perspective, many may or may not have that kind of opportunity, scale or budgets to incorporate a lot of these things. Again, it comes back from a safety perspective, how they are set up or how they are efficient. And I understand that it does, sometimes, for the government, it’s like a broad brush, because many, many say that we are set up differently, we can handle it. I think it was a desperation of every government to balance it out and look at incentive opportunities to boost up some of these businesses, I would say.

Julia Raymond:
And David, what is your take? Does it come back to safety? Like Shilpa said.

David Lemley:
Well, I think safety is really important. And I do think each government handles it differently, but as Shilpa was talking, I was thinking about a conversation I had last week with some economists, since the people who sit on the advisory team for the federal reserve and they were talking about this exact topic. And what it came down to, in their perspective, was Walmart’s infrastructure was able to handle the need of humanity, basically. The crush of need in the shifts. So, infrastructure and being big enough to have invested wisely and all of that to be that choice. And while I run a small business, so feel for small business owners, what I learned during that conversation last week was that, there is a cycle to small business. Every eight years, many, many, many of them, I cannot remember the statistic, but it was well over 50% of them, cycle through and they fail or they evolve or they become something else.

David Lemley:
And that is because big systems exist for safety and security and predictability, AKA Walmart. And you could go to them and they had infrastructure and supply chain knocked so that they could have their online system rise by 74%. Small business doesn’t do that. And when we have the safety and security of Walmart being there, and we can also have that safety and security of being able to go out and hang out with one another or buy a dress off a rack or eat at a restaurant. We want something hipper and more entrepreneurial and less big system. And that is where small business and entrepreneurial and new ideas come in.

David Lemley:
And it’s that tension of a big system, entrepreneurial cross-cutting through it to make something different and new and shiny and interesting for humans. I think that’s always going to happen. And the data that I learned on the call was that it does happen on an eight-year cycle and has for over 100 years. This happens to be timed with it. So it seems triply bad, because everyone’s captured. But this also happened in 2008 to 2010 and more businesses, small businesses came out, new businesses came out swinging and created interesting, better financial security for entrepreneurs. It made entrepreneurship actually cool and in regard to this generation.

Julia Raymond:
I love that perspective because it’s an interesting one. It’s almost like there’s a double whammy. I mean, not only do we have the pandemic, but then these natural cycles of change and evolution for small businesses that you mentioned. When we talk about entrepreneurial behavior, we saw that in the 2008 recession where, like you said, a lot of interesting companies formed, and I know that Shilpa and David, we said that AR is something that might evolve rapidly because of this. Are there other technologies, specific to retail that you guys really have your eye on right now?

Shilpa Rao:
Sure. I think a lot of, in terms of IoT, in terms of tracking from a supply chain perspective, tracking from a traceability perspective, and ensuring that you’re getting the right products and tracking them through the life cycle. Also, from a blockchain perspective, ensuring that if it’s the right source and it is rightly… It is kind of curated in the right environment and the right safety measures are followed through, so that is another one. We also see, I think AI has been a trend for a long time now, and we see more and more focus on that in terms of how do you really look at the data and how do you derive insights in terms of what should be my next strategy, be it in terms of merchandising, be it in terms of supply chain or be it in terms of how do I kind of manage my stores better or how do I ensure safety better?

Shilpa Rao:
Also from a supply chain perspective, how do I have the capability to simulate things in terms of what will happen if any disruption happens or what has happened when I go more local and cut off threads with some of the other vendors. How does it impact my overall supply chain? What is going to happen at all? You know, different loads, will I operate my DC differently? How do I get micro with my supply chain? A lot of those kinds of trends are also something that we continue to see. Again, cloud and others, which are, again, other trends. The pre-COVID world will see a lot of significance in the post-COVID world where our retailers are trying to reduce cost and being more agile and having to work remotely, work from home.

Shilpa Rao:
A lot of those will emerge. And then as you said, like AR and video and anything which would help connect with each other in a better way is something that we will see getting forward. Also, this could also see an increase in things like 3D printing, 3D sampling, because not all buyers are able to travel and see the products themselves. So, how can they get it printed with the design sent, and then they can place their order. So, a lot of such technologies missing.

Julia Raymond:
Certainly, I really like the idea of 3D printing samples and 3D buying. And then you mentioned AI blockchain, especially micro fulfillment for supply chains, we’re hearing a lot about that. David, is there anything from your clients that’s top of mind that you’ve been hearing?

David Lemley:
Not to that same level, but as Shilpa was talking, I had this vision in my head of my trunk club stylist, being able to send me things via a 3D printer. And that seemed like, okay, that would be an amazing outcome of this pandemic.

Julia Raymond:
So personalized to your exact measurements?

David Lemley:
Yeah.

Julia Raymond:
Right. I could see that. It might be hard to scale at first, but eventually. That’s great. Well, thank you both. Great comments. Shilpa, David, I really enjoyed hearing your insights today. I know you guys are always involved in retail in your daily life, so it’s good to get these fresh perspectives.

Shilpa Rao:
Thank you so much for having us here.  We loved the questions and this was really interesting.

David Lemley:
Yes, I did as well.