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.

November 2, 2020: Gap to exit traditional malls, Bed Bath & Beyond scales back coupons, Postmates explores retail delivery.

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Hosted by Julia Raymond

Written and produced by Gabriella Bock

Edited by Trenton Waller

 

TRANSCRIPTION

Julia Raymond:
Today we’re joined by my guests, Rick Watson and Mike Shapaker. Rick is the founder and CEO of RMW Commerce Consulting. He previously worked exclusively in the e-commerce industry, with companies like ChannelAdvisor, Barnes & Noble, Merchantry, and Pitney Bowes. Mike is the CMO of ChannelAdvisor, where he oversees the company’s worldwide marketing initiatives. Rick, Mike, thanks for joining the show today.

Mike Shapaker:
Thanks for having us.

Julia Raymond:
The first retailer we’re going to cover today is Gap. Shares at the company rose 11% last week after the retailer announced plans to exit traditional malls and close 30% of its Gap and Banana Republic stores by 2023. The retailer says it will shut her 350 mall-based stores in North America, and switch to a business model that’s driven by e-commerce, and off-mall locations. A spokesperson for Gap says the company is also reevaluating its European businesses, and could potentially close stores in the EU as well. Rick, I’ll pass this to you first. What are your thoughts on this huge decision by Gap, to move away from North American malls?

Rick Watson:
Yeah, I think what they’re doing is basically in-trend in what’s happening to malls in America. I would say there are probably 30 to 50% more malls than there needs to be, given the popularity of malls. It kind of reflects that about 30% of malls are around what’s called Class A malls, so you can think of it as any mall you run into that has an Apple store in it, and is more or less a Class A mall, not because there’s an Apple store in it, but because those are the high, those are the premium locations, and Apple knows what it’s doing. So it’s kind of a trend towards what I would call an e-commerce first strategy that you mentioned here as well. A lot of the up-and-coming brands in the last five or six years, they started in e-com, and then they moved into retail after. Bonobos and Warby Parker are kind of the most prominent examples of that. And so this is a little bit more right-sizing, from Gap in the beginning, and that’s kind of where I would start from on this topic.

Julia Raymond:
You made a good point about how there’s maybe too many malls and only 30%, I believe you said, are Class A malls. So it sounds like you’re pro this strategy, for Gap reducing its mall locations in North America. Do you think this will become a trend for other retailers, Mike?

Mike Shapaker:
I think so. I recall there was an article in the Wall Street Journal, I think back in September late last year. They quoted a research firm that talked about half of all mall-based department stores closing by the end of 2021. So if that’s the case, moving away from the malls totally makes sense for Gap. But I think another angle here, and Rick touched on it a little bit, talking about the direct-to-consumer brands starting online and moving offline. You can think of Gap as a brand, not a retailer. So they’re an established brand, they just happen to have an established offline network, which that’s how they started, that’s why, and so now they’re taking steps to right-size that network. But once they work out those economics on the store side, I think Gap has the opportunity to position itself as a direct-to-consumer brand, that’s in the casual clothes business, which during the pandemic, has been the place to be in apparel.

Mike Shapaker:
During the original shutdowns back in March/April timeframe, we were looking at our aggregate data across all of our sellers globally, so thousands of sellers and marketplaces. And we could see that casual apparel was outselling work-related apparel by a pretty wide margin. And the difference has closed a little bit, it’s not as dramatic as it was back in March and April, but I think comfort is still popular. And at the macro level, retail has taken a hit during the pandemic because people can’t go into stores, but that’s in-person e-commerce has really performed well. So this I think overall, it’s a good opportunity for the Gap to get their store footprint figured out, focus on online business, and then take advantage of the trend that exists right now towards comfortable clothing.

Julia Raymond:
And Mike, you made a good point about how they really are a brand more so than a retailer in terms of how they offer direct-to-consumer casual apparel, which has been super on-trend during this pandemic, when we’ve all been at home. Do you think the Gap and Kanye West partnership will be good for the brand? What do you guys think about that?

Rick Watson:
I don’t know which one of us is an expert on Kanye West, but celebrities are obviously selling products these days. So I’m sure it can’t hurt them. Kind of going back to kind of the mall question, I mean, a number of brands, I don’t think you’ll ever see them get rid of their stores in general. I mean, most of these brands can’t afford not to be in stores really. There are a couple of reasons. Number one is they’re like stores are the only thing that fulfill the manufacture MOQS. So they need minimum quantities to order from their manufacturers, stores are the only way to do that. E-comm demand is more incremental. Unless you have a business at scale, it’s very hard to predict what you’re going to need in a system, whereas if you’re selling to a retailer, or have your own stores, you need to stock those stores.

Rick Watson:
So you can commit certain amounts manufacturers to get your supply chain, and cost of goods where you want it. I think second is, new shoppers, the only way you experience a new brand… One of the big challenges with online, it’s hard to introduce a new brand by itself, because you become compared to everyone else, on Amazon or wherever you go. So the fact that someone can come, walk into a store and experience your brand means that you can acquire a new customer and have some emotional brand attachment to it. It’s not a big deal for resellers that are just trying to sell things at the lowest price for the best reviews, that happen to be all the time, but for a brand that wants to have a long-lasting impression with the consumer, they need to have that.

Rick Watson:
And then finally from a customer acquisition point of view, stores are a very efficient way to add people to your email file. And that’s a huge, obviously benefit for that. I mean, there are cross-channel benefits for that. And so I think this will hurt the growth of Gap’s kind of direct email business in some sense, because they have less consumers coming into the store, but there’s probably not enough people coming into those malls anyway.

Julia Raymond:
Absolutely Rick, I think you make a good point. But I’d also add, with GDPR in Europe, and the trends around data, I think it will become less of the expectation or the norm that as you’re purchasing at the checkout, they ask for your email, and it’s kind of like they expect you to give it to them. Of course you can say no, but I think it might be trending in a few years the other way.

Julia Raymond:
Great. Well, good comments on Gap. Let’s go to another segment on delivery. So just in time for the holidays, the Local Delivery app, many of you are probably familiar, it’s called Postmates, and last week, they announced they’re launching a new retail platform. The company’s new virtual storefront will give customers access to same-day delivery from clothing, home, beauty and wellness retailers. Launching initially in Los Angeles with plans to expand to other cities next year, the new service platform will include boutique stores like Estee Lauder’s Lullabot, home goods retailer, Parachute Home, and menswear brand, Buck Mason. Meanwhile, other delivery platforms like Instacart and DoorDash are also testing out retail. Instacart recently announced it partnership with Sephora, while DoorDash has a new deal with Macy’s, to provide same-day delivery from 500 Macy’s and Bloomingdale’s stores. Mike, I’ll pass this one to you first, do you think same-day delivery is or will become the standard in retail?

Mike Shapaker:
I do, but this to me is one of the more interesting topics. And so I’ll probably go a little bit roundabout of an answer. I think if you start with Amazon, they’ve built out fulfillment infrastructure everywhere. At least in the US and they’re doing in other countries as well. So they’re blanketing places with fulfillment centers. And so right now, especially in the big Metro areas, same-day delivery is available from Amazon at maybe a little bit more of a cost. Again, probably more prevalent in Metro areas, but they keep investing. So same-day feels inevitable at least from Amazon, but most other retailers do not have that infrastructure. So one way that other retailers can compete is going back to the stores that we just talked about, with Gap is providing same-day delivery from the stores, and then you can do that in a number of different ways. Or making it as easy as possible to go to the store and pick it up, pick it up yourself. So buy online, pickup in store. And we’ve seen a lot of on-the-fly innovation in that during the pandemic.

Mike Shapaker:
So those are both viable options for pretty much everyone else to compete with a massive infrastructure and capital that Amazon has. And in grocery and restaurants, that’s really the only option because hot food, cold food parishes pretty quickly. However, when you look at the last mile or, how do you get the product to somebody from a retail store, or even through regular e-commerce, everybody wants it for free, but it’s where a ton of the cost is. So there’s real cost involved, no matter what approach you use. So obviously Amazon spends billions setting up their network, not many people can do that. Delivering it yourself is an option. There’s a story going to restaurants, again and the Wall Street Journal a year or so ago, I think Jimmy John’s or Panera, one of those, charged $3 for delivery, but their cost was $5. So they were losing money on the delivery.

Mike Shapaker:
Setting up a buy-online-pickup-in-store processes and infrastructure, it has cost associated with it. And then finally to the question, using companies like Postmates or Instacart or DoorDash, those are pretty costly too. There’s been a lot of press out there about restaurants starting to balk at some of the high fees, upwards of 25 to 30% or something that they’re taking from some of the restaurants. So no matter what method you decide to do, there are costs associated with it. And there’s lots of talks about drones and autonomous vehicles, and maybe one day we’ll be there and maybe that’ll be the secret sauce that gets all the costs out, but it’s definitely not widespread yet. So when you think about from a retail perspective, doing a deal with Postmates, to me if I were the retailer, looking at what’s happened to some of the restaurants, and what you’ve seen with some of the restaurants, I would not necessarily want to get myself locked into any one solution with one of these partners.

Mike Shapaker:
I’d want a variety of options and I’d want to encourage a behavior from my customers that provided the best economics for me, or charge appropriately the customers for that. Obviously you need sufficient volume, with sufficient volume, all of these become a little bit more viable, but again, I wouldn’t lock into any one, if I was a retailer, I’d try to maintain control. So having said all that, coming back to the original question, I think like Postmates or DoorDash, how what they’re doing works out, maybe it depends on how they interact with consumers. So I personally don’t see myself going to one of these delivery services and shopping on those services, like Postmates and Lullabot. I think that’s an option. But if I go to Macy’s and DoorDash is integrated into the checkout experience, I could see myself using that as long as the value was there for me in terms of the cost and the convenience.

Julia Raymond:
Mm-hmm (affirmative) you made a good point, Mike, comparing it to what the restaurants have been going through with these third party delivery services. And I’d like that you mentioned, don’t get locked-in if you’re a retailer who has not yet made any deals with these services, don’t lock into a single one. I think that was a really good piece of advice. Rick, do you agree?

Rick Watson:
Yeah, I definitely do. Each one seems to have its own niche. And I liked a lot of what Mike said around, they’re kind of two big models for fulfillment right now. One is kind of the e-comm centric companies. Amazon obviously has enough money, more money than anyone to build their own same-day or next-day delivery infrastructure everywhere. And so everyone else is looking for a different model. What Target has done with their dotcom site, they were number two or three in e-commerce in the US right now is, a lot of people still don’t know that 90 plus percent of their e-comm orders were fulfilled from stores. And many of them were fulfilled same day or next day. And that’s infrastructure that they’ve invested in. They’ve acquired startups, and shipped, and some delivery, to do that on their own.

Rick Watson:
And so not everyone can acquire a startup. So that’s the next tier down. If you’re not going to build it yourself, you’re going to buy a startup to do it. The next tier down is, you need to use a provider. And so almost everyone else is not going to build their own infrastructure from scratch, if you’re not named Walmart. And so you need to find a provider, to get to some kind of same-day or next-day shipping thing. And I kind of agree with Mike that this is something where the consumer isn’t shopping directly from these apps, they’re shopping from the site that they like. And I think that’s less true of Instacart. Instacart is more grocery focused, with Kroger and Whole Foods, and others, and there have been a lot of discussion in the news about fights between these retailers, and who owns the customer.

Rick Watson:
It’s a huge problem speaking to them. Instacarts charges retailers over 30% of the purchase for its own. But if you are a mid-sized merchant, if you’re going to see Postmates and DoorDash plugins into the major e-commerce platforms out of the box, Shopify right now out of the box, you can have a Postmates integration set up in 15 minutes, if you want to. And then if you use the Shopify POS system at the same time. So I think this trend is going to keep increasing, and it will be easier for merchants to do.

Julia Raymond:
And I like Rick, that you pointed out Target, one of the top stores right now in the US, the retailer is fulfilling 90% from stores. I think that is a very impressive target for other companies to go after, not to use the word, target twice, but you know what I’m saying? It’s really impressive. And what do you guys think that there’s going to be new startups that pop up with delivery during this holiday season? Because we’re already hearing that some 3PL’s are denying retailers, their extra fulfillment, because they’re just already packed?

Rick Watson:
I can start here, I mean, supply chain technology has been a huge focus of VC Investment in the last two or three years. There’s a lot of capital moving into the sector, mostly in the venture capital space. Last mile delivery, 3PL’s, same-day delivery, even analytics around predicting where items should be placed in warehouses closest to the consumer, Shopify bought a robotics platform, in the last few years, 6 River. So there has been quite a bit of competition in supply chain and execution, not just in this next quarter, but I would say even in the last couple of years.

Mike Shapaker:
Yeah, and I think, given all that though, unless there’s a startup that’s already operating and has a relationship with the retailers, I can’t see it this late date, somebody spinning up out of the blue and fulfilling a big chunk of packages, given that we’re just about on top of the holiday rush.

Rick Watson:
Yeah, there’s a midterm being banded about shipmageddon that we’re hitting, and so I think it’s a real thing, this all holiday.

Mike Shapaker:
You may have a situation where it’s, “All right everybody come into work today, bring your car, we’re going to load it up with packages and addresses.”

Rick Watson:
They’re going to turn you into a shipper.

Julia Raymond:
Honestly, that might not be too far off for the season. So we’ll see. Good comments on that. Let’s move to the third and last retailer, we’ll talk about today. This one has been getting a lot of press this year, it’s Bed Bath & Beyond. They have been shuffling out their leadership team all year long, it’s been crazy. So they have made strides to turn their business around, since the company’s President and CEO, Mark Tritton took healm last year. In their most recent announcement, they said they’re scaling back coupons after they did a study of 405 million shoppers’ baskets and 285,000 items. And the study revealed that 40% of their promotions were ineffective. So Bed Bath & Beyond plans to launch more than 10 private label brands over an 18-month period, and will invest, this is huge, 1 billion to one and a half billion and its business. And this will include redesigning 450 of its stores over the next three years. Rick, after struggling for several years, do you believe Bed Bath & Beyond is regaining its footing?

Rick Watson:
Regaining its footing is probably accurate. Anything more than that, I don’t think I would go there. John Wanamaker had a famous saying that, “50% of my advertising works, I just don’t know which 50%.” I don’t think that’s unique to Best Buy or anyone, I think that’s true of every single retailer and brand on the planet. Most people have some idea of what advertising is working, but ultimately it’s about testing and learning. I think Bed Bath, the only advantage that they had in the past is that they were nearby, they had this membership program, which they were losing money on, and they had an extremely, extremely generous return policy from the past, that they have discontinued in the last year, that you could return, it was almost like an L.L. Bean return policy for things in the past. So I think they’re regaining their footing, they had entirely too much inventory in their stores that really had no differentiator.

Rick Watson:
And that even the whole concept of Bed Bath & Beyond was created in a time where there weren’t things like online marketplaces, where you can buy anything from your home and have it arrive the same day. So I think they need to re-imagine who they are, and get back to the romance or the product, have a good, better, best strategy across most of their product lines, rather than you go in, you see like 27 varieties of trash cans when you walk in the door, no consumer needs 27 varieties of trash cans.

Julia Raymond:
That’s funny. Mike, do you want to hop in? It sounds like Rick is actually a little bit more on the negative with this one. He’s like, “Hey, Bed Bath & Beyond concept came around before we had all these wonderful marketplaces where it was so easy to get new sheets on Amazon in two days.

Mike Shapaker:
Yeah, no, I tend to agree with Rick. I throw away a lot of stuff though, so I need a lot of trash cans. But obviously the team running Bed Bath & Beyond know way more about their business than I do, but I can speak from personal experience. So I just received the coupon yesterday in the mail, funny enough. And when I have gone into Bed Bath & Beyond to buy something, I forget the coupon about half the time. But I’ve gone there, and I think it’s what Rick said, it’s the location. I needed something quick lane, so I went there to buy it. And so I’m there, so I don’t drive home again because I forgot the coupon, I just go ahead and buy it. Which means I’m willing to pay full price while I’m in there.

Mike Shapaker:
But once or twice when that’s happened, an associate has actually scanned a coupon for me, that’s sitting behind their desk, which was actually very nice, very kind of them to do for me, but it’s lost margin for the business, because here I was buying this thing without the coupon, which I was willing to do. But on the other hand, I think that the problem with these ubiquitous coupons is that everybody knows about them and it’s associated with Bed Bath & Beyond. And so if I do make a purchase and I realize, “Oh, I forgot the coupon and now I’m paying full price and I could have saved 20%,” when I’m walking out I feel worst about the experience than if there had never been a coupon to begin with. So I think, the long and short of that story is that I think probably scaling back with coupons could be a good thing for them, as long as they have everyday prices that everybody considers fair and reasonable. But the concept is pretty ingrained in many consumers’ minds, so I’m sure it probably won’t be an easy transition to get off of those coupons.

Mike Shapaker:
And switching every private label, which you mentioned, I think that’s pretty interesting as well. I think private label has been around for generations. It’s nothing particularly new, but I think what is new is there’s a lot of retailers that have started to put more investment into private label, and Target again, to bring them up is held up as an example of this. Brands like Good & Gather and Cat & Jack, and new maybe 40 something brands of their own. And according to its annual report, about one third of its sales came from owned or exclusive brands, which obviously is a higher margin for the retailer. And like Costco with the Kirkland signature brand is another example.

Mike Shapaker:
I think I read that it’s a $40 billion brands and maybe more than a quarter of their revenue. And it seems like there’s a lot of retailers in that 20 to 30% range, some higher, some lower, but a lot in that 20 to 30% range, the ones that are doing it well. And so I think Bed Bath & Beyond is around 10% today. So investing to get that number up, into that 20, 30% range, it feels like it makes sense in terms of margins and trying to catch up with some of the other retailers are.

Julia Raymond:
And do you think it’s ever too late to be starting private label brands or is it always a good time?

Mike Shapaker:
Well, I mean, as long as they still have customers coming to their website or coming into their store, it’s not too late. The interesting thing about private label is, when you’re whatever’s in your visual space, that’s what the private label is competing with. So in a store, you kind of see everything. Yeah, at least peripherally, you see all the products that are there, the 27 trash cans that Rick mentioned. Online though, most consumers don’t click beyond that first page. So however many search results there are in that first page for a generic search, private label has a chance of actually being a high percentage of those results, and could theoretically help the online results from that aspect. I don’t know if Rick has a thought on that?

Rick Watson:
Yeah. I mean, I think at the end of the day, most private labels that have been successful have been introduced on the retail side, outside of Amazon basics, and maybe some Happy Belly. Amazon is like not been extremely successful with its private label strategy, even though there are lots of people that are upset about it, most of them have been complete failures given that there are dozens and dozens of them and only two are really worth speaking about. And so I think a retailer has a much better chance, Target is famously fantastic at its private label strategy, has a number of really great brands across all sorts of categories that they seem to promote.

Rick Watson:
I think Bed Bath is kind of looking to follow Target’s success in the private label area, and to the extent that they have traffic in their stores, I agree with Shap, that there’s plenty of opportunity to introduce new brands for their customers. Because a lot of these competitive brands are at the low end, and you can source them from the same place and, many times the consumer doesn’t care. And if you’re trying to create a good, better, best, you can come in wherever you want on the strategy, you can just pick two brands that you like, and then add your own to it, seminar, cereal or clothing or anything in some of these stores.

Julia Raymond:
And I have noticed in the past that Target does phase out after a while certain private label brands and just rebrands them essentially. So it’s been really interesting to watch their journey.

Julia Raymond:
Last comment on Bed Bath & Beyond. What do you guys think about the incredible amount of money they’re planning to spend on store redesign?

Rick Watson:
I hope they can get enough traffic into the stores to justify that is the short answer. For sure the stores need to be redesigned. If you look at like Target’s investment in stores over the past three years, they’ve basically built zero stores over 40,000 square feet in the last three years, almost zero. I mean, all of these mega stores, they don’t want to add more of them, because if you ended up in a place where a mall or whatever the location gets hollowed out because of retail distress or communities migrating, then you’re in big trouble with a lot of real estate and a lot of goods. So the trend in retail has been towards smaller stores. So I think as part of a larger store refactoring, it probably makes sense.

Mike Shapaker:
Yeah, I mean, if you’re going to be in that business, you should invest in it. I think we’ve seen examples of retailers that did not invest in their stores and that didn’t end up well either. So…

Rick Watson:
Yeah. J.C. Penny, Sears, all these folks come to mind. And obviously many of these failed for different reasons, but every little bit helps. The best time to invest a billion dollars is when you have a bunch of new capital and a new CEO too.

Julia Raymond:
Absolutely. That is true. Well, Rick Watson and Mike Shapaker, thank you guys so much for joining the Retail Rundown today. I enjoyed hearing all of your insights and I hope that you will join again in the future.

Mike Shapaker:
Thank you for having us.

Rick Watson:
All right. Thanks so much.