November 04, 2019: Nordstrom’s New York flagship, LVMH’s Tiffany proposal, Amazon drops grocery delivery fees for Prime members

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.

 

TRANSCRIPTION

Julia Raymond:
Our guests today include Charlie Cole and Shep Hyken. Charlie is the global chief eCommerce officer at Samsonite and the Chief Digital Officer and active advisor at Tumi. Prior to his current role, Charlie’s experience spans an eclectic mix of startups from corporate to venture based in private equity. Shep is a customer experience expert and the Chief Amazement Officer of Shepard Presentations. He’s also a New York Times and Wall Street Journal bestselling author and has been inducted into the National Speakers Association Hall of Fame. Charlie, Shep, thank you both for joining the Rundown today.

Shep Hyken: 
Hey, great to be here. Charlie. It’s nice to virtually meet you.

Charlie Cole: 
Likewise, Shep. Good to be here and should be fun.

Julia Raymond:
Excellent. So we’re going over three retailers that are in the news this week. The first one, of course you could probably guess is Amazon. So they’re heating up the competition and just last week they slashed it’s Amazon Fresh grocery delivery subscription, which was previously $15 a month for prime members down to zero. So that’s a pretty sweet deal. Prime members can now order a free two hour grocery delivery. There’s a small caveat though, if you’re a Prime member, you can only use the service if you’ve previously paid for the Amazon Fresh subscription. So the rest of us, myself included, have to go and request an invitation at least at this time. So Amazon is challenging Walmart with their grocery delivery subscription, which they rolled out this year for $98 annually. Kroger also launched their delivery service last year, and then we all know Target acquired Shipt to offer same-day delivery. So a lot is going on in this space at this point. It seems like Amazon’s more willing to burn money if it means reducing its costs for customers and winning more slices in the proverbial market share pie. So Shep, I want pass this to you. Considering all of the factors and the lack of infrastructure, do you agree that this subscription model won’t be sustainable for Amazon?

Shep Hyken:
On the contrary, I think Amazon has figured out that it will be sustainable. One of the things that Jeff Bezos has done from the very beginning is sacrificed margin in favor of a better experience for the customer. Now I don’t think they’re going to lose money. That reminds me of the old saying, you know, the radio announcer, “We lose money on every sale, but we make up for it and volume.” That’s not going to work. But I do believe sacrificing margin has always been a strategy for Amazon and they’re not sacrificing it bound to zero or to a loss. But I think it’s important to recognize what’s happening is we have entered into era of convenience and a big part of convenience is delivering what all of these retailers are figuring out is customers love to have things delivered to them so they don’t have to leave their homes and their offices, whatever. And I also want to point out that you know, while there has been a fee involved in the past, even if it’s reduced down to nothing, don’t think that it’s free shipping or free delivery because it’s not, it’s being paid for somehow some way there might be an extra few cents added to items across the board. I don’t know how they’re going to make up for it, but they will figure out a way to do so.

Charlie Cole: 
I think they’re uniquely positioned to, even if they do lose money. And, and I haven’t done the unit economics analysis or anything like that, I know that also in the news they kind of took a beating on their stock price because they’ve been taking much more cost involved in their operations. But Amazon’s uniquely positioned to absorb this because their fastest growing basis segment is advertising. And so if this leads to an influx of consumers, even if the consumers themselves are unprofitable on a unit economic basis, you’ve got to keep in mind that this has also been part of Amazon strategy, which is basically use retail and grocery, and whatever it may be, as a loss leader, You know, we use it to build your brand so you can sell cloud storage, use it so you can build your brand to sell advertising and ultimately that’s what gotten them in a little bit of hot water. I think it’s more like tepid water politically at this point, but I think that they even have to Shep’s point, even if their break even or close to it, they can absorb a little bit of a loss because it could fuel a much more profitable part of their business.

Shep Hyken:
Yup. Good comment. And Charlie, that’s why you’re the high paid executive over the company you work for. Very smart.

Julia Raymond: 
Exactly. I love that. And as Shep said, you’re paying for it elsewhere. Probably as a consumer, the increased prices of the items. And then like Charlie’s at the loss leader approach has worked for them before. And I guess that’s an interesting way to look at it because they’re not going after creating more Prime members. They’re going after, like you said, their fastest growing segment, which is advertising.

Shep Hyken: 
Actually I think that they’d love to increase their Prime member base, but I believe the goal being what can we offer Prime members that will make them want to re up every single year. And that’s the key. They don’t want to lose it. Years ago, not that many years ago, Jeff Bezos was asked, “Are people really willing to pay this kind of money?” And back in the early part of Prime, I think it might’ve been at 20 or $25 membership and it got you free two-day shipping on things that you would buy from Amazon. And now it’s expanded to much more than that. And they asked, you know, like, you know, “You’re giving away all the movies, you’re, you know, all the TV shows on the Amazon prime video.” And his concept was we need to create such value for the customer that they keep saying this now, what is it, it’s more than $99 — it’s $129 now.

Shep Hyken: 
I should know I pay it. I don’t really care about how much it costs because I know I’m getting so much more value in return for what it is, but that’s what he’s doing and his company is doing is they’re delivering value at multiple levels and multiple ways in chapter.

Charlie Cole: 
I have a question for you, Shep, and Julia, I’d love to know your thoughts on this as well. Do you think that this push into advertising, and it’s always very highly mentioned in earnings reports, do you think there’s a chance that that advertising can dilute that value? I mean, I think what we’re ultimately talking about is this counterbalance between a consumer’s willingness to give data if they’re shown value back, but advertising tends to cause some dilution to that promise. When you think about, Facebook has certainly got a lot more heat as they started doing advertising.

Charlie Cole: 
They used to be this love service and now they’re almost demonized. I’d love know, Shep, if you think that there is a risk of that or if there’s somehow insulated from it?

Shep Hyken:
Nobody’s insulated from it. I believe there’s definitely a risk, but let’s take a look at the history books. All you have to do is say, okay, what’s the best case study on this? Let’s look at Facebook. That’s what we don’t want to do. So what can we do that is congruent, that meets the needs of the customer? And if there’s one thing that Amazon has done and granted with all the AI, you go on to just the Amazon website, it says, welcome back, uses your name. Last time you were here, you looked at this. I don’t think any customer thinks that’s creepy. Okay. What’s creepy is when the ad started popping up, when you don’t expect them for things that you said that you may not even need.

Shep Hyken:
And I think the mistakes that were made are, and it’s not so much even Facebook, but there’s been retailers, you know, it’s like if I decide, “Hey, I’m going to go buy a baby gift for somebody,” all of a sudden I’m on the list of being at the pregnant mother and I’m not the pregnant mother. I’m the friend of a pregnant mother who I bought a gift for. So even your marketing and advertising the wrong ways, but we, we as a general in retail are getting so much more sophisticated at this. There is a line and I think companies need to understand where that line is and not cross it. I’m really hoping that Amazon is one of those companies. I believe they are. I’m a huge fan of theirs. A lot of things have been said a lot more good than bad, but even the bad, I questioned like what is there jealousy? Is there anger? Are you upset with somebody for being that successful? But I think they do, right? So many different ways.

Julia Raymond:
I would just add in there, you know Alibaba is obviously a huge competitor and I, I know that from conversations with people and things I’ve read online that it, they tend to share more data back with their advertisers than Amazon. So it will be interesting to see how Amazon deals with maybe some pressure moving forward when it comes to sharing its data

Shep Hyken: 
And they are getting a lot of it. That is for sure.

Julia Raymond
Great. Most of you have probably heard that Nordstrom just opened their flagship and New York city just last week. So they’re exploring small formats to now as big as can be with this new location in Central Park on 57th and Broadway. It’s 320,000 square feet. It’s huge. It has a seven floors and it has retail and entertainment venues within. So it also has like lavish features. They have a Nike boutique, they have Coach customization shop, several restaurants and, get this, a full bar in their shoe department. And that is something I can get on board with.

Shep Hyken: 
A bar in the shoe department.

Julia Raymond: 
A full bar

Charlie Cole:
Not just beer and wine. It’s no second rate establishment.

Shep Hyken: 
I’m getting excited just thinking about it. Are they going to charge for these drinks?

Julia Raymond: 
You know that I do not know. I will have to look into that. But yeah, it’s crazy. I mean I have never seen this before. So really exciting. And they actually opened a few other smaller local hubs in the Upper East side village just last month. So they’re doing a lot. But one thing I’m wondering is because they have so many department stores, even Nordstrom itself has had to downsize in recent years. Does it make sense, Charlie, for them to add a flagship of this astronomical size? Is this logical for them?

Charlie Cole: 
I mean there’s a, there’s a lot of layers to that question. So look, the fact we’re talking about it shows that there is some kind of a marketing halo effect. The fact they chose probably the highest rent district in the United States, not the world, but in the United States shows that they hopefully did some math on the confidence of it. But I think the challenges are going to be like, so number one, as we talked about Amazon, one of the things Amazon did so well is just changed the rules on inventory because they had such a large part of their business that was marketplace based. The cashflow and the cash constraints and the payment terms and all sorts of stuff kind of went out the window. And the reality is Nordstrom is perpetuating that problem. If you’re going to have a 320,000 square foot store, you’ve got to have stuff in it, you’re gonna have stuff to sell, you don’t have people to sell it.

Charlie Cole: 
And this concept of people don’t buy stuff they buy experiences has become such an overused cliche that in order to actually accomplish that promise, you have to go so far above and beyond, right? So we’re talking about bars and stores and personalization. And so with that, I think that all of this just perpetuates this problem, which is: You can’t just win as a department store with your merchandising point of view. Right. It used to be you’d go to Collette in Paris cause you could buy stuff that you couldn’t find anywhere else and you’d go to East of town in Tokyo. I think we can all agree finding stuff is the easy part. As we talked about Amazon and we talked about AI, we talked about Google “organizing the world’s information.” It’s pretty easy to find stuff to buy at this point and so the challenge for Nordstrom becomes how do they make 320,000 square feet of differentiation and experiences and I think it’s a tall task.

Charlie Cole
I’m not a brick and mortar expert, just like I referenced before, I haven’t done the math. If I had to guess, their rent on that place is eight figures, mid eight figures a year. So they’re going to have to do some serious profit coming out of there. But I really wonder can they survive with the unit economics of a department store model, meaning inventory and people, against the unit economics of a marketplace model, which allows for people like Amazon and others to pay for all the other services that allow for those experiences to be differentiated — to allow for one hour delivery ,to allow for complete ubiquity of selection. That’s the challenge that department stores really have is not just the constraints of the 320,000 square feet of physical space. It’s the realities of the inventory in person based business model. So I’m going to go with Julia to give you a straight answer. I’m skeptical, but I’ve certainly been wrong before and who knows, maybe if it doesn’t work out. We work with buy this building too. Who knows?

Shep Hyken: 
Yeah. Oh We work. We had to talk about We Work.

Charlie Cole:
Weren’t they the ones that bought the old Lord and Taylor building or something like that?

Julia Raymond:
I’m pretty sure they were. I mean I, they’re popping up everywhere. Taking in big mall space.

Charlie Cole: 
Yeah, but so I don’t know Shep. I mean, when I listen to your love of Amazon and all of our love of Amazon, as a consumer, I’m not sure 320,000 square foot retail space helps Nordstrom accomplish this, which is what layers my skepticism on it. I mean what’s your take?

Shep Hyken: 
So first of all, Nordstrom has not had a great presence in New York City as such, and I think this is a great opportunity to do so. And they did it in such a way, it’s like go big or go home. Well, they went really, really big. So let’s take a look at some of the expensive real estate in shopping, whether it be Bal Harbour shops down in Miami, Florida area, which I think at one point if they aren’t still, we’re some of the most expensive real estate for retailer. You look at some of the shops that are in Las Vegas and some of these like Caesar’s Formal, very, very expensive. You have to wonder are they making money? And the answer to that is in those particular locations, they may not be. I hate to use that word loss leader. I don’t think anything should be a loss leader, but I take a look at what advertising costs are and I think we need to take a look at what benefit in visual, the experience and all the press and the hype that goes into a store like this. Which by the way, I predict this is just the first of many stories you’re going to hear about that in Nordstrom location.

Shep Hyken: 
We’re already talking about the bar. What else are they going to have at that store? I mean are they gonna start selling Peloton bikes and actually have Peloton classes and aerobics classes and yoga classes to sell the equipment? We’re going to see a pretty, I think innovative department store that’s gonna maybe even redefine what retail department stores are all about. So that’s one comment. The other comment is we have to take a look at the retailers that are expanding. I don’t remember all my numbers, but I wrote an article recently in Forbes that basically said retail is not dead. It’s only dead to the ones that are lousy at it. And I’m not suggesting that some of these long-term, you know, well known names are really lousy at it, but they’re not changing, adapting to what’s needed in the marketplace. And I believe Nordstrom has been very, very effective. They’ve done some small store and testing different types of concepts. Obviously this is huge, but I think retailer, if you look at Amazon’s getting into brick and mortar. Target’s, expanding, Lululemon’s expanding, what are they doing different than the other retailers? So many fingers out out and they can go on and they can join that same bandwagon.

Julia Raymond: 
And I just have a question for you Shep real quick. Because I know Charlie’s said you’re a little bit skeptical because they’re going to have that perpetual inventory problem and just given the cost of rent at this location is astronomical. But Shep, you said they’re going to probably have a lot of a marketing play here. Do you think that is going to drive the foot traffic? Is this going to become kind of like a tourist location?

Shep Hyken: 
Wouldn’t that be nice? But look what happened to FAO Schwarz? Wasn’t that for many years at tourist location? I don’t know how much money they did or didn’t make in their toy store, but eventually it’s like we can’t afford to keep it going. But there were other issues that plagued them. I think, uh, it’s a destination, no doubt. And in prime, I mean, I can’t wait 57th and Broadway. I know exactly where it is. I know where I’m going the next time in New York City. But to get to your point, if you’re not constantly redefining what you do and constantly, doesn’t mean we’re going to see a change every month or maybe even every year, but I think it’s going to be happening on a more regular basis than it’s happening before because we need to speed up the ability to keep up. Boy, that’s a tweetable line, isn’t it? We need to speed up the ability to keep up with the way the changes of what our customer’s expectations are and they’re being changed because there are some rockstar brands out there that are teaching our customers what great service, what great experience, what a great retail experience is all about.

Charlie Cole: 
There’s a trend that you referenced briefly Julia in specifically in this Nordstrom that I fundamentally believe in and that is, there’s sort of like this, “we’re stronger together mentality” between brands and department stores or let’s just say brands and retailers and the place I think typifies at the best that you guys have not seen the Footlocker in Washington Heights where Nike basically took it over. You walk in, it’s a Foot Locker store but inside is a bunch of custom localized Nike experiences and so think about like the symbiosis where Footlocker gets to basically hedge its bets and feature ita star brands and who knows, maybe Nike pays rent in that store. Nike certainly is doing some custom things such as the Washington Heights store has like shoe collaborations from local artists on weekly. They have this genie concept where you go in and push a button and you entered it by some of these limitations shoes.

Charlie Cole: 
I think that is a trend where as Shep said really smart brands are going to say, okay, look for, well for years and years and years brands basically said like our retail stores need to be the absolute fashion of our brand. That’s true. But now what? Right? So now the customers are still going to Nordstrom and still going to Footlocker and even though they’ve been put under strain on Amazon, that’s an opportunity because what are these amazing experiences you can enable regardless of the real estate your consumer happens to be walking through? And so I think that trend of you referenced Coach customization store, I think that if you have a chance to go to the Foot Locker in Washington Heights, it’s such a cool localized experience where a brand has to embrace a culture first as opposed to just pushing its brand through regardless of what it feels like the channel is. I think that that kind of idea of reinventing the shop -in – shop, if you will, is going to stick and it’s going to force brands to be a lot more thoughtful about how they do it.

Julia Raymond: 
Absolutely. I love the local flair that’s involved in that store cause I think that probably really drives the emotional connection that customers feel

Shep Hyken:
Anytime you can do local, well that’s the thing. The national brand has got to, I believe, and I know I’m jumping off a little bit of a tangent here, but I believe that a local brand who understands how to do local well, can have a competitive edge against the big box store or a big brand that comes in. And I use ACE hardware is an example. Even though it’s a recognized brand, actually internationally, they’re all locally owned dealerships. They’re all locally owned stores. They compete against much larger big box store competition. We’ve got a little ACE hardware that’s 15,000 square feet versus you know, the Home Depot that’s a hundred thousand square feet that out spends an advertising 30 to one. And just recently I was asked this question, “Can a large retailer do local?” Well, what they do is they go into the local community, they bring in the local artist, if you will, you, they get involved with a cause that’s locally focused and not nationally focused. And they start to attract a little bit more of that local crowd

Julia Raymond:
Might be tough though for Nordstrom to do that just because of the nature of that area. Having huge foot in tourism.

Shep Hyken: 
That’s a difference though. If you’ll look at Nordstrom specifically and you hit that particular store and what they’ve just done is created that flagship. It’s all about you’re in New York, it’s big and it’s international and you’re right. Probably the concept of local isn’t as important there, but the concept of experience is even more important if they want that foot traffic.

Julia Raymond: 
And like Charlie said, just rethinking a little bit the shop- in – shop concept and how it’s executed. Well, we’re going to hop to the last and final retailer and today’s Rundown. If you think about really old brands, this one is 182 years old, so if you take a wild gander you might guess Tiffany & Co. And they soon might be saying “I do.” They have been offered by Louis Vuitton and Christian Dior, parent company LVMH to buy the brand for $14.5 billion. So, yeah, that’s a big move. It’s an all cash bid and it values the jeweler at about $120 a share and was 22% more than the October 25th closing price. So interesting to see what Tiffany will decide. Shep, do you think this is a fair valuation for Tiffany’s and do you see any risks associated with the potential acquisition or is this the right move?

Shep Hyken: 
Wow. I mean I now you’re, I’m putting my analyst cap on so I feel like I should be on that show Boo-yah. So you know, I think that they’re definitely paying a premium price for this. I’m wondering, are they trying to bring the Tiffany brand into their stores? Are they trying to bring their amazing products that they sell on all the different into a Tiffany store. So I don’t know if I walk in, am I going to even see a Tiffany store and is that important? I don’t know. So the Louis Vuitton brand, there’s more than 75 different brands associated with that company and adding Tiffany, I mean, that’s an icon that stands on its own. I wonder if they’re going to dilute the Tiffany name by bringing it in to all of these other luxury brands. So I want to go to Charlie and say, Charlie, what do you think?

Charlie Cole: 
Well, yeah, the analyst hat is a fun one to put on Shabbat. They have about, call it $1 billion in EBIT a year as it stands, right? So if you start to think about it really just logically, if they change, nothing, just kept the business as it as the investment would pay for itself in about 15 years. But if we seen LV do this stuff in the past, it’s for one of two or three reasons, but foremost, it’s, “Hey, let’s penetrate a sector that we really have struggled to do.” And the luxury, jewelry sector or diamond sector, whatever you want to call it, it’s really under siege. You know, it started with the Blue Niles of the world sort of disrupting the distribution concept and now you’re seeing lab grown diamonds kind of have a much more sustainable angle, which really resonates with a younger audience. And so I kind of think LV sees an opportunity for a category under disruption.

Charlie Cole: 
Why not have the biggest name in the space to lead it? Right? And so I kinda like it. I kinda think that LV is well positioned in the luxury marketplace. I think that’s not the most revolutionary statement you’re going to hear today. But more importantly they see a category which I’m just broadly saying luxury jewelry or jewelry or diamonds or whatever you want to call it, they see a category that’s in flux. And so if you have an opportunity to kind of get the leader in that space and then embrace that change, much like everything we’ve talked about, the consumer expectation is changing and will continue to change. And if you are the category leader as a brand, you have the opportunity to drive that change as opposed to follow it. And I think that might be what LV’s thinking about here and look, I mean Tiffany traded at about 140 a year ago. So is the valuation fair? I’m not sure. I’m not, I’m not a financial analyst, but I like the IBS strategically behind it. If they’re doing what I think they’re doing

Shep Hyken:
And I think they’re paying a 20% premium from the closing price from what? Just the few days or a week ago. I don’t think that’s an unreasonable premium pay.

Charlie Cole: 
I agree.

Shep Hyken:
You look at what the market’s been doing and we’re talking, we’re talking market price, which isn’t necessarily the true value what the company is, but if you just look at what’s based on the stock price, I think that’s a small premium pay when you look at other companies that are doing multiples on top of that number. So I haven’t saw always based on sales multiples, but I think when you take a look at, you know, we’re also making an assumption and we’re hoping, and by the way, I hope this to be true to isn’t the market continues to do well. One of the things is if you look at the brand and you look at, Tiffany, I like to think that stock prices are based on their, the fact that the company’s a good company, a solid company that returns a good ROI on any investment. You mentioned that company We Work, Charlie, there is a great example of how could the price be that high for a company that doesn’t make money that loses that much money every year? So riddle me that one. Batman,

Charlie Cole:
The last thing I’ll say on the LV side, Tiffany & Co., When you look at their revenue, it is disproportionately the Americas and Asia with a massive, massive chunk in Japan. Right? And so what does that mean? I mean, where is LV the strongest? You would probably argue Europe and China along with those two markets. So I think there is some very tactical stuff behind the scenes that makes this make a heck of a lot of sense. And, and if you can make Tiffany the number one luxury destination and unsafe Bulgari in Europe and just really kind of drive this luxury movement with China, which is happening quite naturally. And there’s obviously an appetite for kind of us and European brands. I think tactically they have a huge amount of expansion that can be done across Europe and China in particular as well. So I like this one and Shep, if we can figure out how people keep on getting valuations at multiple billions of dollars with never having made it a dollar a profit, I think we could make a really profitable business together if we can answer that right.

Shep Hyken:
And you know what, and you and I are going to be partners real soon on that one.

Julia Raymond:
I love that. Great points expansion into Europe and China. I could definitely see that happening. They have a great brand portfolio. This would be complimentary for them. So the interesting thing will be to see, you know, as Shep said how they’ll handle the brand, uh, and hopefully not dilute it with the changes they’ll need to make to adapt to the disruption. Like Blue Nile and other companies that Charlie mentioned. So great points. Okay, well that wraps us up. So Charlie and Shep, thank you so much for joining.

Shep Hyken: 
Yeah, really fun to be here.

Charlie Cole:
Yeah, it was a lot of fun Shep. We’ll stay in touch.