L2’s Scott Galloway and Maureen Mullen review the retail landscape of 2017 and make predictions for 2018 in their video “What Brands Should Do in 2018”

A fantastic overview of the retail sector by Scott Galloway and Maureen Mullen. Go checkout and follow their YouTube channel at: https://www.youtube.com/user/l2thinktank/featured

 

What Brands Should Do in 2018

 

00:02 Scott: So, we’re here with Maureen Mullen, Chief Strategy Officer for L2, and co-founder. Maureen, we’re going to talk about the big themes in 2017. But first off, happy holidays! What a joyous time of the year it is around here! Alright, enough of that *bleep*! So, big themes, 2017.

00:21 Maureen: Well, I think honestly, the biggest thing that came out in 2017 – this is something we predicted back in 2015 – was Amazon’s acquisition of Whole Foods. It’s what the markets have talked about. It’s really about what every stock is reacting to, and it’s had a huge kind of impact, across the ecosystem.

00:39 Scott: Some of that impact?

00:40 Maureen: Well, first and foremost, you now see stocks trading on, really, three primary multiples. The first, obviously, the financial performance of the company.

00:48 Scott: Yep.

00:48 Maureen: The second, overall consumer confidence. But the third, what Amazon has or has not announced, over the previous kind of 24-hour period. So, everybody has seen the data around what happened to retail stocks, kind of post-Whole Foods acquisition.

What a lot of people haven’t seen is it had a similar impact, actually, to a lot of the manufacturers’ stocks, as well. So, companies like General Mills, Nestle, etc., were down precipitously, in that 24-hour period, following that announcement of the acquisition.

01:19 Scott: And then, they announce they’re thinking about going into the drug store business. CVS and Walgreens down in the morning, and by the afternoon, manufacturers’ brands and the drug stocks start going down.

01:29 Maureen: Yeah. It’s happened, literally, in every single industry. You see them going into furniture, announcing moves in fulfillment, private label there. You see Wayfair, Williams Sonoma, down the next day. You look at moves that they’ve made into fashion and apparel, it’s absolutely decimated the stocks of the department stores, as well as a lot of the retailers.

We’re seeing everything kind of move in anti-gravity to Amazon. And I think that goes kind of hand in hand with some of our predictions for 2018. We believe we’re going to see a lot more kind of big announcements, like Aetna/CVS.

02:02 Scott: Yeah, kind of a year of strange bedfellows. What about the other, maybe even the retail story of the year – Walmart?

02:09 Maureen: Yeah. Walmart, a lot of us didn’t see it coming. In fact, in 2016, we predicted that Jet.com was going to be one of the biggest write-offs in retail history. They acquired it for $3.1 billion, which really looked like a glorified acquihire.

Kudos to Walmart, and kudos, actually, to Marc Lore, and to the team that he’s brought in with Jet.com, because that’s inspired a real sort of revolution. And I think, not just in terms of their numbers – they’ve, in the last kind of quarters, been up about 60%, on the e-commerce side. And that was coming after 6% growth a year ago.

So, they have massively turned around their e-commerce operations. But they’ve also just changed their entire body language to the street. They’re kind of stealing a page out of Amazon’s playbook, and literally every week, kind of pulsing out with something that they’re doing, something that they’re killing, an acquisition that they’re making. And they’ve started to kind of take the mike back, a little bit.

03:08 Scott: Yeah. Other themes?

03:10 Maureen: Other themes, on the media side. Big loser of 2017, Snap. It was a prediction that we had made, kind of heading into their IPO. The stock has flat-lined, and Mark Zuckerberg really is kind of the culprit there. He’s been able to take every consumer product that they have launched, basically copy it in his Facebook, Inc. ecosystem, and attach a massive well of data, from a targeting standpoint. And advertisers are staying with Facebook, Inc.

03:40 Scott: And do you think Snap’s strategy of separating social out from media, winner or loser?

03:45 Maureen: You know, that’s the big announcement that they made in late November. Their stock is up slightly, kind of following that announcement, and some of their more recent earnings releases. I think it’s been kind of messed up for a while.

Snap has been very vocal around the fact that they are not a platform for content creation for brands. They are an advertising platform. You know, trying to avoid some of the pitfalls that Facebook has made, historically.

The reality is that consumers are willing to kind of pay a tax for a great consumer platform, just as they are for great content. I think the separation of media from the social aspects, I think what it just basically results in, it’s honorable, but it’s just less advertising dollars.

04:28: What about subscription?

04:30: Subscription, in a lot of ways, I think subscription was a big bomb in 2017. You look at some of the biggest headlines; Blue Apron, probably the worst performing IPO we’ve seen in the last five years. The stock is off 70% from their June numbers, and it really seems like it’s kind of dead on arrival.

You look at other kind of legends of subscription; Birchbox, where they fired 30% of their staff. There are some inklings that they’re kind of getting to profitability. We’re just not hearing the same sort of stories of hope and optimism that we have historically, there. And then you look at Trunk Club, which was $197 million write-down for Nordstrom. The signs for subscription, all sort of pointing in the wrong direction.

And then, probably the biggest bust has been Dollar Shave, which really, post-Unilever acquisition in July of 2016, have seen their numbers kind of drop precipitously. They haven’t been adding new users at the same rate. They haven’t been able to retain the same users. So, we’re not all that bullish on traditional subscription models, as they’ve been kind of inked out, for a lot of these newer age companies.

05:42 Scott: We also said that there were going to be several $10 billion-plus retailers that would go belly up in 2017, and we got that wrong.

05:49 Maureen: Yeah, we definitely got that wrong. Looking back 12 months ago, I think we weren’t the only ones that thought a Sears, a Macy’s, a JC Penney; one of them would not be with us, today. I think the reality around retail, and really around business, is that what you think is going to happen, and going to really accelerate quickly, typically does take a lot longer than you think.

The interesting thing, the biggest predictor around whether or not a retailer will go out of business? Whether or not they outsourced their e-commerce business, in the early 2000s, to Amazon. We’ve seen Toys’R’Us, probably the biggest bankruptcy of 2017, outsourced their business, similar to Circuit City, who had outsourced their business, around the same time period. Also, Borders, who had outsourced their business, after a terrible holiday in 1999.

All three retailers have gone belly up. The interesting one is Target. You know, a decade of business, e-commerce business, being done on Amazon. When they exited the Amazon partnership in 2011, it was estimated that they were doing about $1.2 billion in revenue, through Amazon, and have slowly but surely done some interesting things in-house.

But seem to never have gotten kind of the mojo behind their e-commerce business. Which, for all intents and purposes, given the demographics that they sell to, give their merchandising strategy, they really should have been the real winner here.

07:13 Scott: And it was supposed to be a year of bots, but you’re bearish on bots.

07:18 Maureen: Well, bots, I think the biggest indicator around sort of the failure of bots, has been Everlane kind of moving off of the Facebook Messenger platform, in March of 2017. Everlane was literally plastered all over all of Facebook’s investor decks, as kind of the poster child for how to incorporate Messenger, and bot technology, into everything from the ordering process, to some of the outfit recommenders.

And they decided that email was just a more effective tool. I think artificial intelligence, and some of the chat technology that we saw in the early days of Facebook Messenger, that’s not going to go away. But Facebook made kind of several wrong steps there, in the sense that they kept that technology very isolated to Facebook, Inc., so bots were not that discoverable.

And frankly, they kind of put up a walled garden, from a development standpoint, so it made it very difficult for retailers to keep their sites up to date.

08:16 Scott: So, Stitch Fix. Where do they fit in?

08:18 Maureen: Well, I think Stitch Fix is obviously the subscription model that’s kind of broken the mold. And I think there are a lot of reasons. Actually, I think they’re a good forward-looking indicator around what might work with subscription. So, successful IPO, their numbers have been really impressive. Really high retention numbers. About 86% of women actually re-purchased their “fix,” or kind of the box that they’re being sent monthly.

Their marketing dollars, as a share of total revenue, a fraction of what we’ve seen from other e-commerce startups. I think what’s interesting, they had originally kind of pitched themselves as the Netflix of fashion. That wasn’t really what ended up working for them. It was coupling the algorithmic nature of predictive analytics, to decide what women should wear, with this very human touch, with their stylists.

And that one-two kind of combination, I think, is really an interesting one, not only for the apparel world, but I think we’re going to see more of that kind of play out in subscription businesses. What they do, that’s different than a Dollar Shave, or even an Amazon Subscribe and Save, is they don’t necessarily lock you in. So, they take some of that decision-making out of the consumer’s mind, but they also allow you that optionality, to kind of send things back.

09:34 Scott: What has Stitch Fix done, that Trunk Club wasn’t able to do?

09:38 Maureen: I honestly think it’s the stylists. I think it’s some of the merchandise. I think it’s at a lower price point. I think they’ve done a better job of appealing to kind of the demographic of people who, frankly, doesn’t like to shop.

Trunk Club was appealing to a consumer who, by the virtue of what they were paying for clothes, they were typically somebody who would be in a Nordstrom or a Men’s Store, or what have you, naturally. Because they were somebody who cared about fashion.

This is kind of taking a decision that might not necessarily be as important to, you know, a mom in the middle of Wisconsin, or what have you, and making her feel good about herself. I think it’s been a very successful business model.

10:15 Scott: So, Nike, big announcement. Nike decides to officially distribute, granted, a limited number of SKUs, on Amazon. Speak to that?

10:22 Maureen: Well, it was kind of, I think a watershed moment for Amazon, as they really try to move deeper into fashion and other higher-margin businesses. Nike is obviously a good logo to have on any masthead. I think the announcement that was made in July, really got a ton of sort of wheels in the press.

The reality was that Nike decided to distribute those 40 styles, in exchange for cleaning up a lot of the third-party and gray-market merchandise. From our data, we don’t see a lot of that as having changed all that much. And I think, indicative of the fact that there are still third-party SKUs that are getting significantly more review volume, higher sales rank, and more visibility on the Amazon platform, that aren’t, frankly, quite damaging, kind of, to the core Nike brand.

It also, I think, really signals that Amazon is not really willing to make major concessions with anyone. If you don’t make them with Nike, who do you make them with?

11:19 Scott: So, a big brand goes on Amazon in quote/unquote “partnership,” it always ends up working for one. And that’s Amazon, not necessarily the brand.

11:15 Maureen: That’s kind of what it appears to be. And I think, as Amazon gets deeper into private label, as they get deeper into some of their own businesses on the technology side, it feels like they’re pulling further and further away from partnerships with consumer brands.

11:41 Scott: So, looking forward. We talked a lot about voice in ’17. I think we predicted that it would be huge, and I think we got that right. Talk a little bit about voice in ’18, and what it means for retailers, CPG brands.

11:52 Maureen: Well, if you look at the two battlegrounds that have really kind of popped up from the big technology players, one is voice. And you see Google, Apple, and obviously Amazon, making huge investments in voice, and huge partnerships in voice. The other is content.

I think everybody, when talking about voice, instantly thinks “What is the percentage of Amazon purchases that are going to be made over Alexa?” The reality is, I think that number, at the end of 2018, probably still isn’t all that significant. But slowly but surely, I think they’re really creeping in. They’re becoming the interface of our home.

It’s the one place you don’t have your smart phone on your body at all times. And I think, slowly but surely, they’re going to kind of creep into that overall operating system for how we live our lives at home.

12:40 Scott: So, just as Amazon wasn’t in video, they used their access to the consumer to get into video, and they used it to get it to get into the media business, they’re going to use Alexa at some point, probably. It will just be a different order, right?

12:51 Maureen: Exactly.

12:52 Scott: It will be data, then it will be media, then it will be shopping of some sort.

12:56 Maureen: Absolutely. And I don’t think they’re concerned, if that shopping doesn’t happen immediately, nor, I think, are they even trying to facilitate that. I think when you see players like Sonos, who are now putting Alexa into the actual speaker; one, it spells, I think, the death of the smart appliance world.

Why are you going to buy a refrigerator with technology in it, which you have to hang onto for ten years, when you can go out and buy an Echo Dot for $30? It’s just a much less risky purchase. And slowly but surely, I think, by keeping those prices low, Amazon has become the operating system for voice, and in our homes.

13:31 Scott: So, some predictions or questions. Retail, outside of Amazon, in 2018. Good or bad year?

13:38 Maureen: It’s going to be an interesting year, because one of our big predictions is that Walmart, who has obviously accelerated on the e-commerce side, 2018 is when they really make big moves into online grocery, and specifically grocery pickup. They already have piloted this at more than 300 stores. They have huge net promoter scores, but they haven’t really been talking about it.

And when a player that’s as big as Walmart, and who has quietly sort of owned 25% of the grocery market in the U.S., starts to make some major inroads, I think that puts a ton of pressure, not only on Amazon, to accelerate their investments, but on Kroger, on Safeway, and the whole host of grocery retailers that definitely are going to have to accelerate their e-commerce.

14:23 Scott: So, Walmart does really well. What about the rest of retail?

14:26 Maureen: You know, I think you’re going to continue to see a lot of store closures. There’s still a lot of reckoning, I think, that has to happen in apparel. You’ve seen apparel square footage in malls go from 42% to 50% of the mall, in the last decade. But in reality, apparel sales have gone from 42% to 43%, so I don’t think that we’ve seen the end of store closures.

The reality is, I think, the path for retail, and a lot of the categories that are getting hardest hit, sort of seem similar to what happened in consumer electronics, about five years ago. Back in 2010, consumer electronics hit about a 20% penetration online, and that’s where you saw the Circuit Cities and the Radio Shacks start to go out of business. Best Buy has emerged from that, I think, all the healthier. And I think we’re going to see the same flight to quality in the department store space, and in the specialty apparel market.

You also see kind of a phenomenon now, where there’s so much pressure on a lot of the landlords, that I think retailers can start signing shorter-term, more flexible leases, which actually changes, kind of, their balance sheet dynamics, quite considerably. So, I think you will see some retailers that take advantage of those dynamics, and actually turn them in their favor.

15:38 Scott: What about CPG companies in ’18?

15:40 Maureen: Well, CPG has been an industry, kind of second to retail, that’s probably been hardest hit this year. And I would argue it’s been less around some of the overall performance dynamics, and a lot more kind of what’s happened in the markets. They’ve gotten a ton of pressure from investors, through activism and what have you, to consolidate or to divest huge investments.

I think CPG is going to need to continue to innovate. I don’t think the flight to a lot of smaller brands, $10, $20, $30 million-dollar businesses, that have alternative business models and distribution strategies, is going to change. Now, you see a lot of the big CPG companies dealing with that phenomenon differently. Unilever is trying to launch a number of those brands, and also been quite aggressive on the acquisition front.

P&G has actually really doubled down around a lot of their core franchises, like Tide. It’s hard to see kind of who emerges victorious, but there’s no question, I think, that’s going to continue to be an industry that’s in a bit of tumult. Now, I think you will see prices, on the acquisition side, start to come down.

16:46 Scott: So 2018, Amazon makes another acquisition?

16:49 Maureen: I think, with retail prices as low as they are, and Amazon on kind of the tear that it is, I wouldn’t be surprised at all. It makes sense for them to make an acquisition of somebody. We’ve always said Nordstrom. That gives them access to an assortment of high end brands.

Frankly, it also makes a lot of sense, right now, to make an acquisition in Europe. We’ve always said Carrefour. Carrefour is actually considerably more attractive, particularly after the recent kind of partnership between Ocado and Casino. So, you now see they’re kind of the player left out of the French market, which an Amazon pairing would kind of make a lot of sense.

17:25 Scott: What about an Ulta or a Restoration Hardware, trying to get into beauty and furniture, at the high end?

17:31 Maureen: Ulta and Restoration Hardware, I think, are unlikely, just because of their valuations.

17:36 Scott: Yeah, they’re expensive.

17:37 Maureen: They are companies that are doing really well. I think there’s a lot easier plays to kind of make in that space. Even a Williams Sonoma, to a certain extent. Probably not going to happen, but you could see Amazon making an acquisition there.

But I think regardless of whether it’s Amazon or other players, I think Aetna/CVS is just the beginning. I think the big theme of 2017 is it’s time to bulk up. For the first time, everybody is looking at Walmart as this almighty savior. Now, this is a company that we’ve literally thought of as one of evilest retailers in kind of the history of the U.S. economy. The reality is that somebody is finally going toe-to-toe with Amazon. That’s seen as a good thing.

And I think you’re going to see every industry kind of start to consolidate. You’re going to see people kind of look at each other, not necessarily as competitors, but as people that are fighting the same foe. I think you’re going to see a lot of interesting kind of partnerships, as we head into 2018.

18:33 Scott: So, there you have it. A look back at 2017, and predictions for 2018 from Maureen Mullen, Chief Strategy Officer and co-founder of L2.

 

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