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.

August 24, 2020: Payless re-enters the playing field, e-commerce sales growth, Tapestry to re-evaluate need for brick-and-mortar.

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Hosted by Julia Raymond

Written and produced by Gabriella Bock

Edited by Trenton Waller

 

TRANSCRIPTION

Julia Raymond:
Ricardo is the senior director of global enterprise marketing at Infovista and a retail influencer with 20 years of industry experience focusing on digital transformation. Brandon is a retail and consumer strategist with over 20 years of experience in the operational and technology space within retail, wholesale and consumer sectors. Brandon, Ricardo, you guys have been on before. It’s great to have you back.

Ricardo Belmar:
Thanks for having us.

Brandon Rael:
It’s great to be back, and glad to have a show with Ricardo.

Ricardo Belmar:
It’s always a pleasure, Brandon.

Julia Raymond:
Always. And you guys have a lot of expertise in retail, so I’m excited to hear your thoughts. The first bit of news is positive. So after a few months away, American shoe retailer Payless is back. Last Tuesday, they relaunched, and US consumers can shop brands on their website, such as Airwalk, American Eagle, K-Swiss, Kendall and Kylie and Aerosoles. And the e-commerce site has been revamped. So as part of its omnichannel rollout, Payless plans to open 300 to 500 freestanding stores across North America over the next five years. Payless says its new stores will focus on customer experience and include onsite digital components, including smart mirrors, touchscreen wall panels and a first of its kind augmented reality foot comparison chart. Payless CEO Jared Margolis told members of the press they plan to roll a variety of diverse community partnerships throughout the year as they continue committing itself to bringing more community responsibility, fashion-forward footwear, and on-trend partnerships to its, get this, 60 million plus customers. Brandon, Payless relaunched its new e-commerce site last week. What are your first impressions of the new site?

Brandon Rael:
I think overall, we take a step back and look at it from a brand equity perspective, to quote William Shakespeare, what’s in a name? So there’s something to be said for brand equity in today’s compressed and hyper-competitive retail market. And now with a streamlined e-commerce and digital focus, Payless seems well-positioned, and they have a unique opportunity that other retailers that have gone bankrupt or have liquidated haven’t had, basically a do-over. Their operating model has always been focused on providing quality shoes and sneakers at value-driven price. There clearly are advantages to starting from scratch. They’re leveraging in digital customer-facing technologies to engage, attract and retain that value-driven customer. Will throw some caution in the wind, though. And I think it’s all positive news, and the e-commerce site looks like it’s been streamlined. But the previous version of Payless lost their way with a change in consumer behaviors around digital. There were a lot of increasing operating costs as well as the competitive forces coming from off-price discounters, and that ruined their business over time. I see it as a positive, obviously, to being cautious and very interesting to see how this plays out with a new iteration of Payless.

Julia Raymond:
So interesting change. You said they had some issues with the increasing customer demand for e-commerce and maybe that’s where they slipped up in the past.

Brandon Rael:
Yeah. And I think they dominated the market. And then I think the discounters, such as Ross and Marshall’s, TJ Maxx and Target and others, have really penetrated that value-driven customer space in the shoes and in the casual sneakers areas. So I think they definitely have brand equity, but they had to find a way to be authentic and distinguish themselves in a sea of competitive retailers.

Julia Raymond:
Mm-hmm (affirmative). A lot of competition still. Ricardo, what’s your take?

Ricardo Belmar:
I think I really have to say, on paper, I think the plan sounds pretty good. It feels like they’ve done their homework. They really thought about what it means to be an omnichannel retailer. I think this whole bankruptcy process they went through right has really hit the reset button for their business and allowed them to lose a lot of the weight that was holding them back. I think Brandon’s right about the things that they’ve got to watch out for here. I see three things maybe that I wonder about with what they’re doing. One is there was a note in there of what the CEO said, I think about their pace at which they plan on introducing new stores, which sounded actually quite aggressive. They were talking about, I think, adding a few hundred. I forget exactly what the number was. But you have to wonder about a discount store like this adding, at a rapid rate, stores in middle of the pandemic and expecting people to come in and wanting to try on shoes, which maybe isn’t necessarily the way consumers are thinking about it at the moment.

Ricardo Belmar:
But that said, they also outlined what I think is a pretty impressive investment in technology for that in-store experience compared to other discount retailers. I think they talked about digital mirrors, a lot of use of touchscreens and AR-based foot charts for sizing. Honestly, to me when I read the list, I was thinking all the way back to when the original Rebecca Minkoff store opened in Soho, New York with the level of in-store technology they were talking about. And it’s a bold move, I think, to do that. I have to wonder about the cost that they’re going to incur to do this per store and, again, back to that in a rate at which they open them and wonder if that’s really maybe a bit too bold for where they are.

Ricardo Belmar:
And then back to the website, I think it looks and feels more modern perhaps than it used to. I’m not sure how deep a selection really they have at the moment. And for me, if I’m the consumer, I’m probably going to start wondering how does this compare to other online shoe retailers, like a Zappos where I might now have gotten accustomed to shopping with since Payless exited the market before. So how are they going to differentiate? That’s kind of where my head goes to and how they’re going to do this. And then I started to think, well, maybe this is why they think they need that aggressive plan for store openings because they need the stores to drive demand even on the digital side of things. I think there’ve been plenty of data points with other retailers about how out of sight is out of mind. So if I don’t have a store in a particular region, then people don’t think of my brand, and so they don’t instinctively go to my website to shop. So maybe there’s a little element of that in what they’re trying to do.

Ricardo Belmar:
I do think an advantage they have is this 60 million strong database of previous customers. So I assume that there’s going to be a fairly aggressive marketing plan there where they’re going to start outreach to these customers and generate a lot of interest and excitement over what they’ve got. It’ll be curious to watch how this progresses for them. I think it may be a little bit of an uphill battle. But I hope it works for them, and I hope they have a good start to it.

Julia Raymond:
Mm-hmm (affirmative). And you had some good points about it might be a little aggressive, at least the numbers they’re planning for the reopening strategy, 300 up to 500 in the next five years. That seems like a lot. And that’s in addition to their existing 700 international stores.

Ricardo Belmar:
Right. Right.

Julia Raymond:
So it’s quite a lot. And then I agree. The website, it looks and feels maybe a bit more modern than the old site. I don’t know that I’ve had enough experience with purchasing from Payless online to talk to that. But I definitely hope that they can have some success because I think they have a lot of good data. It just might be a bit cost prohibitive maybe in the beginning with all that they’re planning to do. And then to get customers back in store, are they going to continue discounting their already discounted products? So [crosstalk 00:07:57]-

Ricardo Belmar:
Right. Yeah, really, it’s that trade-off from the technology investment they’re proposing in-store to the operational cost. They’ve got to train employees to know how to use it properly and consistently with what the expected level of sales per store is going to be. So it’ll be interesting to watch.

Julia Raymond:
Mm-hmm (affirmative). Are you guys surprised at all? Because we covered Payless on the rundown when they first declared bankruptcy, and there was a lot of speculation that another company would buy them out. Are you surprised that they bounced back so quickly?

Brandon Rael:
I’m somewhat surprised. Their brand equity diminished somewhat over the last decade or so, and apparently there’s still a market for them. I think I echo your sentiments about being so aggressive with some of these store openings and leveraging the store as a media or a place to connect with consumers in a global pandemic. So that might not be the best strategy, but it seems as though they’re going all-in with technology and leveraging digital insights from the consumers to retrain and attract new consumers. So it might work out for them different this time. I think it’s definitely a niche they can fill. And if they do it the right way, they’ll be around for quite a while.

Julia Raymond:
Mm-hmm (affirmative). Absolutely. Well, good points on Payless. The next segment I’m going to discuss is a little bit on e-commerce. I have some numbers that might blow your mind. In the US, e-commerce sales grew more than 30% for the first and second quarter of 2020. That’s according to quarterly numbers released by the US Department of Commerce just last week. And retailers like Target reported noteworthy growth in e-commerce. It’s curbside pickup service has increased by more than 700%. 700%, huge. And at Walmart, the retailer reported impressive quarterly numbers. Its e-commerce sales jumped by 97%. and while the pandemic was quick to accelerate the growth of e-commerce, data from the July census indicated most consumers are continuing to shop online even after most stores have reopened. According to a report by Kantar, 40% of consumers say they have increased or significantly increased their online shopping amid the pandemic. Ricardo, do you think that Walmart and Target’s gains indicate lasting behavioral changes among consumers with e-commerce?

Ricardo Belmar:
Yeah, I honestly think there’s almost no doubt at this point that behaviors have changed for a lot of people. Kantar’s study said 40%. I can probably pretty safely count myself and my household in that 40% because I find we’re shopping more online than we ever did before. In fact, we’re shopping online at more retailers than we did before. And that’s even considering that we’re, like most everyone I know I suppose, Amazon Prime members, but we’re still using Instacart and we’re using Shipt from Target. I can also count myself within the 700% increase of the Target curbside users. Been there are many a time. So yeah, I have to say that if my household is any example, we’ve pretty much used, I think, every single fulfillment method Target has now in these last few months, both because of convenience and also just from a sense of avoiding going into a store. If I were to look back at how often do we go back to stores, people I know in the neighborhood when they’re going back to stores, the habits haven’t changed. None of us seems to be going back as frequently as we used to. And that’s for any product category. We’re all making use of delivery services, shipping, curbside pickup. These have all kind of become a muscle memory, I think, for everyone.

Ricardo Belmar:
And I think Target probably is the biggest beneficiary of this because they really have fulfilled their promise, I think, to become the easiest place to shop. Now, I say that and maybe with a small grain of salt because people who knew me have also known that I’ve said in the past that while it’s great that Target has all those choices, sometimes those choices create a lot of confusion when you want to shop at Target. So for example, and I think, Julia, we may have talked about this in the past too, that now you can be in the Target app on your phone and you get presented for the same item a different set of fulfillment options than you do if you’re on Target’s website online. So how you shop sometimes impacts what choices you get. And that might be a little confusing. Not withstanding that, it certainly doesn’t seem to have impacted their earnings and sales. So congratulations to them for that. But I think it’s a Testament to how prepared they were in recent years at, not foreseeing a pandemic obviously, but foreseeing the desire of consumers to want to shop this way.

Ricardo Belmar:
And I think they’ve done a great job implementing those capabilities and accelerating them during the pandemic. And they’re obviously seeing the benefit from that. And obviously Walmart and in a similar manner, they’re benefiting from that. I think that a big difference I see between them are the reasons that people go to one store or the other. I think a lot of that has to do with where you are. Maybe there’s a demographic component to that as well is where you instinctively choose to shop between one and the other. I think other retailers who we’re not hearing such great stories from despite the massive increase in e-commerce, other retailers maybe are losing a little bit to these big-box brands, like Target and Walmart, because they’ve just become that go-to from so many consumers. So there is a bit of a broader impact to that.

Ricardo Belmar:
I also like to look at when e-commerce grows this fast now, what does that do to retailer’s margins? I think, again, kudos to Target. And believe if I read correctly in their report, they not only increased their sales, but they’re not really taking any kind of a margin hit for the increased use of all of these different fulfillment methods, which means they’ve really managed to eke out the right operational efficiencies that allow them to do this effectively. I think they even saw reference that they’re fulfilling, what was it, maybe 90% of their orders now from stores. That just seems mind-blowing that they have done so well at this that they can fulfill everything from stores versus distribution centers now. So they certainly understand how to get the operational efficiencies that they need to be successful.

Julia Raymond:
Absolutely. And that’s interesting because they’re also opening these smaller format stores. One just opened near me. And so the strategy that they’re implementing seems to be the right one. Ricardo, you had a lot of great points about how they are the poster child for this, and they were prepared before the pandemic to serve the needs that we’ve now all began having. So Brandon, do you agree with everything Ricardo said? Do you disagree? What are your take?

Brandon Rael:
Well, I completely agree, especially around how these behavior changes will be long-lasting. People have adopted e-commerce and digital shopping through mobile devices so quickly. And really, I’m full of quotes today, but to quote another good friend, Carl Boutet, “The COVID-19 pandemic has become the great acceleration for all the trends we’re seeing about digital for the last few years.” It’s really been on the rise for years now. Consumers were already shifting to a hybrid of physical/digital commerce. But the big-box retailers, Target, Walmart, Home Depot and others, are really, like Carl said, leveraging the store as the micro fulfillment centers. So in particular, Walmart and Target have already placed significant investments and bets in the digital commerce space, into the billions. And then they’re starting to pay dividends as they both have the scale, the capabilities, the infrastructure, the physical stores, their own distribution network to meet the surging demand to come up during this pandemic how the consumer has shifted to a more online model.

Brandon Rael:
So again, Walmart and Target were already doing outstandingly well before the pandemic. They were already making their [inaudible 00:16:05] pivots and investments around a digital-first consumer. And that consumer wants to control how, when and where and why they shop. And these two and others, big-box stores, are meeting those demands and evolving and pivoting accordingly. So they were already well-positioned, well-prepared and made the necessary investments and strategic shifts to be prepared for this kind of a pandemic. And it’s paying off.

Julia Raymond:
It is paying off. And you mentioned the big-boxers have those distribution networks and the scale to make billion dollar investments over time. But what about these smaller retailers? Where do they fit in moving forward? Is it a bit sad because the conversation is becoming, “Okay, it’s Walmart, it’s Target, it’s Amazon”?

Brandon Rael:
Good point, Julie. I think they can compete on experiences and connecting with the community. And I think there’s a losing some game if they try to compete with Target Walmart and Amazon on price and macro fulfillment efficiencies. There has been a migration from the consumer to go to downtown, some main streets, to [inaudible 00:17:14] independent retailers to support the local community. So that still matters, that social responsibility, that connection to community. Can those small, indie retailers compete on price or speed or efficiency? No, but they can compete on experiences. They can compete on connecting with consumers and knowing them personally. They can also leverage third-party fulfillment capabilities. There’s Instacart, Uber and others to move the goods from the stores to the consumers’ homes in a more efficient manner. They won’t have the capabilities to vertically integrate the supply chain and fulfillment capabilities [inaudible 00:17:49] stores. But they have ways to compete, and a lot of it centers around partnerships and collaborations with the distributors as well as the third-party fulfillment companies. So it’s not [inaudible 00:18:00] for them either. There’s an opportunity for them as well.

Julia Raymond:
Mm-hmm (affirmative). And in the experience. And like you said, the community focus, Payless, That’s something that their CEO was talking about with their most recent news, the community responsibility.

Brandon Rael:
Yes.

Ricardo Belmar:
Yeah. I would add maybe there’s a couple of other interesting things at play. So these both smaller retailers, and I might even group generally any specialty retailers into this category too, that there are some slightly different challenges at play. So Target Walmart, those brands, some advantages that they have apart from scale and investment is their location. So they’re off-mall. They’re in strip centers or shopping centers that it’s an easy in, easy out, which at the moment at least, during the pandemic, I think it’s generally becoming visible to everyone that consumers want that easy access, easy in/out trip. They’re not looking to spend an afternoon at the mall, which maybe hurts retailers who are generally only located inside enclosed malls. So there’s that challenge to overcome.

Ricardo Belmar:
But even at the same time, what’s interesting to me too is that not all the big-box guys are in the same successful position. I think Kohl’s also announced some of their results, and it wasn’t quite as rosy a picture as it was for Target or Walmart. And one of the comparison points I’ve been drawing upon a lot in discussions with people is that Kohl’s saw a decline in apparel sales, but Target actually saw an increase. Now, why is that? So certainly there’s got to be an actual product and merchandising element to that. Target has always been very adept, especially with their private lines, at curating a selection of products that people want. And not just products people want, it’s people that they want and are willing to buy. And Kohl’s, I think, maybe is suffering a bit in that regard as are some other retailers that maybe the whole apparel sector in general. Target, by adding grocery, they managed to become an essential retailer. If it weren’t for their grocery selection, they wouldn’t have been named an essential retailer during all the lockdown phases. And so obviously, they benefited from that.

Ricardo Belmar:
But I think the longterm benefit is that they really, in my mind, have become you’re taking over the mantle of America’s department store. People go to Target, and it’s an experience. I’m not even sure people [inaudible 00:20:22] they’re going to Walmart, they don’t go to Walmart for an experience. But when they go to Target, people still talk about going to Target as an experience. So I think that’s one advantage they have over everyone else. But to Brandon’s point, I think that’s where these smaller, independent retailers have the opportunity. They also can be an experience, especially if they’re off-mall or in downtown areas or other places where you have that easy in and out access. I think those retailers have an opportunity here to create a reason to be in their store. I think if they haven’t already leveraged e-commerce to their benefit, that’s definitely something that they have to be doing. I don’t think any of those retailers are going to be able to just rely on a pure in-store experience only. I think they’ve got to embrace digital if they haven’t over these past few months. And I think we see many of them are, otherwise, it’s tough to explain Shopify’s runaway success.

Ricardo Belmar:
It’s just a lot of different variables at play. I think there’s still hope there. Admittedly, there are additional challenges, I think, for these smaller retailers. And there are so many studies out right now just painting this rather negative picture that so many of them are going to close. I’m certainly hoping that the numbers aren’t quite as dramatically bad as some reports are showing now. But I think these retailers are going to have to actively do something. It’s not a moment where you can sit and watch things happen and hope for the best.

Julia Raymond:
Mm-hmm (affirmative). That is so true. And that’s what makes it so difficult, I think, is just the speed that the pivoting is happening is incredible.

Ricardo Belmar:
Mm-hmm (affirmative).

Brandon Rael:
Really is.

Ricardo Belmar:
Yeah, no doubt.

Julia Raymond:
Well, next, the last topic is about Tapestry. So Tapestry is the owner of beloved brands, such as Coach, Kate Spade and Stuart Weitzman. They announced on an earnings call earlier this month that they saw margins grow by three points during its fiscal fourth quarter. Their interim CEO, Joanne Crevoiserat, told analysts that online sales are carrying higher margins than in-store sales. And the company is in the process of “reevaluating the role of its stores.” Tapestry says it’s planning for store closures but has not yet revealed how many doors it will shut. Meanwhile, Coach’s interim brand chief, Todd Kahn, told analysts that stores are “commercial ventures and not marketing experiences.” Brandon, considering all we discussed in our last segment, do you think Tapestry’s decision to reevaluate brick and mortar is the right move for its luxury brands?

Brandon Rael:
It truly is, I would argue. And I think Doug Stevens has called the store the next center of marketing and experiences and connecting with the community. So I would argue that point that [inaudible 00:23:09] has mentioned. But I think overall, the luxury segment and industry branch, in particular, are not immune to the challenges that the middle of the retail industry has been facing for years. Again, COVID-19 has impacted the role and the purpose of the store and what will be our new normal. Before COVID-19, like I said earlier, the store is the best form of media and customer engagement, along with digital, of course. But now we’re seeing retailers [inaudible 00:23:35] Tapestry brands are challenged to rationalize the store footprints, reduce their operating cost, close improper locations. And the story is still so critical. So you have to invest in their top-performing stores as physical retail is still relevant, even during and post-pandemic.

Brandon Rael:
So I will argue also, with the emergence of AI and virtual reality, luxury segment, they can leverage these technologies and reach more consumers than they had before with mobile apps. So there are those close-knit dependencies on a physical store to drive sales and engagement. So that could be an interim and a short term, perhaps a longterm, move of a hybrid retail model where the mobile technology, such AI and virtual reality, along with the in-store experiences can help Tapestry make up their lost sales from the pandemic and onward. So that’s my thoughts.

Julia Raymond:
Mm-hmm (affirmative). And Ricardo, do you want to jump in here? I know Brandon said he disagrees with Todd Kahn, Coach’s interim brand chief, who said that the stores are not marketing experiences. And you quoted Doug Stevens who has famously said the store is the media channel. So why do you think that Todd takes that approach, Ricardo?

Ricardo Belmar:
I find it interesting that he made that comment. So like Brandon, I don’t agree with that statement. Even particularly for their brands specifically, I don’t really agree that they should strictly view those stores as a commercial operation. To me, that implies that they just see it as a cost center and not something that brings value to their customers. And if that’s the case, then that probably says a lot about how their stores have been doing pre-COVID compared with now. But at the same time, I do think they’re right. Their CEO is right to say they’re going to reevaluate the role of its stores. But that can mean a lot of different things. And Tapestry’s a brand of brands, and they have wholesale relationships with other retailers so their products are not just available in their own stores.

Ricardo Belmar:
And I think they have to evaluate the mix. They need to know how much are they selling from their own branded stores, how much is coming through those wholesale relationships, how much is coming through e-commerce. And they need to seek the right balance that’s going to make sense for their business. Now, does that mean that they have too many stores, for example? It’s possible. It’s possible that they don’t need all of the stores that they have. I would suggest that it probably has more to do with the location of those stores. Are they in the right locations? And maybe we’ll see that they will close some of those doors because they’re not in either locations that are bringing them a lot of sales. Hopefully, they’ll compare those store sales with the digital sales they’re getting from e-commerce and those adjacent zip codes to see how much lift they’re getting from the physical presence. And if it’s not there and it doesn’t correlate, then maybe that’s a store they don’t need. I certainly can see there are ways they can evaluate this.

Ricardo Belmar:
At least I would hope that what Todd Kahn’s comment really had to do with is to say that they need to think about what the stores are for and what they’re doing for them. If their stores are just there to hold product and they’re just sitting back waiting for sales run, then maybe they don’t need that kind of a store. If their store is there to create a brand relationship with their customers and become, as Doug Steven says, more of a media type location or a stores theater where people are there for an experience that makes them aspire towards owning these products, then the store starts to make more sense. And I think that’s true in general with all luxury brands.

Ricardo Belmar:
I think it’s actually noteworthy that they’re saying they have increased their margins by three points during this time. I think that’s actually a statement in and of itself if they’d done that because it goes a little bit against the grain of most other retailers who have been relying more on their e-commerce sales this year who that e-commerce is eating away margin. It’s actually costing them more for those operations than it is for stores. So I think it is interesting to say that they’ve countered that trend here, and that should tell us something about it. So I think they’re an interesting position. I think they do need to evaluate how they use their stores. But to just blanketly say that the stores aren’t an experience and you know, why do we always talk about Nike stores? Why do we always talk about Apple stores as being the best examples of an in-store experience? I think they have an opportunity to become just as good an in-store experience as those brands given the product sets and things that they have.

Julia Raymond:
Mm-hmm (affirmative). I love that comparison to Nike because they are an accessories retailer. So why couldn’t they have something similar? But like you said, they have such a big mix. It must be quite a challenge to determine what the right mix is.

Brandon Rael:
Yeah. One last point, Julie. I think [inaudible 00:28:32] Coach particular pre-COVID for the last few years, they’ve gone away from their discount and mass distribution strategies and really focusing on the more aspirational luxury, higher retails, higher margins. [inaudible 00:28:44] if you’ve gone to the stores in New York City, other cosmopolitan areas, they’ve really focused on brand building and connecting with consumers and also doing quite a bit of personalization and customization within their stores with their accessories and monogramming and personalization touches to the products. So it’s quite surprising that they see their stories as commercial ventures, whereas that contradicts to the strategies they put in place last few years before COVID.

Julia Raymond:
Mm-hmm (affirmative). And I liked that you mentioned that because I actually had Liz Alessi from Coach, VP of sourcing, and she mentioned aspirational retail. That’s a term that she used a lot, so I know that’s something that they live and breathe in terms of that strategy switch.

Brandon Rael:
Nice. Absolutely.

Julia Raymond:
Great. Well, Ricardo Belmar and Brandon Rael, thank you for joining The Rundown today. Always good to have you guys on the show and hear from your expertise.

Brandon Rael:
Our pleasure.

Ricardo Belmar:
Thanks, Julia. It’s a pleasure.