Great presentation by Scott Galloway on the development of brick and mortar retail, and larger implications to the retail industry. Go checkout and follow their YouTube channel at: https://www.youtube.com/user/l2thinktank/featured
I wanted to discuss a little bit about some of the changes in terms we see across our retail members and some of the dynamics and make some predictions about what’s going to happen in 2015, or what as managers you should be thinking about. And we affectionately call it “Winners and Losers in a Digital Age”. So, we’re now tracking about 1230 brands across 11 different geographies and 850 data points across four dimensions: social, mobile, digital marketing, insight. And we see where brands are investing or divesting in terms of the technologies and platforms that they’re adopting, or in fact running from, and we like to think of ourselves as train spotters. Or the metaphor I like that no one else in the office gets because I’m 20 years older than everybody, is, does anybody remember this? This is Hal from “2001 a Space Odyssey” that is kind of always on and watching and seeing what’s going on.
So, some basic observations, the end of pure-play. I think ecommerce businesses are going out of business and that there isn’t going to be a pure-play retailer left within two to three years. And when I say pure-play, I mean either a pure-play e-commerce company or a retailer that doesn’t have very strong digital. Everyone is rushing towards the middle and I think this applies towards almost everybody and probably the best example recently is Fab who in just 14 months went from an evaluation of 1 billion dollars to being sold for scrap. They basically sold for a million dollars just a just a month ago.
Net-a-Porter, Guilt, there’s some fantastic consumer offerings with very charismatic founders and I believe that they’re going to be sold or go out of business because the online only model is not economic when you have Amazon out there who has a series of Engineers and talent and capital that drive the cost of acquisition so high for anyone who’s not a genius at online marketing. And you effectively can’t compete in just this one channel or an isolation of the other channels. And so, a lot of the e-commerce companies are recognizing this and rushing to what they’re hoping is going to be a life raft and they’re opening stores. So, stores are the new black again what was considered a legacy liability has become a new asset in the eyes of retailers and they’re opening stores at a pretty quick clip. Some will succeed, others won’t. The one that’s probably been the most successful is Warby Parker. I’m sure many of you saw this is averaging three thousand bucks a square foot just behind Apple and just a head of Tiffany. Traditional brick and mortars are also rushing towards the middle and growing faster their online efforts faster than Amazon and granted it’s off of a lower base but they aren’t just sitting around like befuddled prey. These are the growth rates of some of the some of the better-known bricks and mortar players.
So, what about Amazon? Because we said pure-play retail isn’t going to survive. We don’t think Amazon is going to be a pure-play retailer. If you look at what’s happened over the last ten years obviously Amazon has outperformed everybody else, but when you get to the five-year chart you start to see that Amazon in fact is not the best performing stock. And if you look at the last year it’s absolutely been a laggard relative to its competitive set. And we think that trend is going to continue unless Amazon figures out a way to solve the last mile problem with these incredible new flexible warehouses called stores. Amazon’s Achilles heel is the last mile. Amazon’s shipping costs are six billion dollars and have risen 30% a year for the last five years and they still haven’t figured it out. And we have been huge fanboys of Amazon but we think that this issue has become a structural game changer for Amazon and that they have to figure out the last mile. Best Buy is using their stores as warehouses and can now get you a TV faster than Amazon can when you order from BestBuy.com versus amazon.com. Probably the biggest trend in retail is a fairly boring trend and it’s Click and Collect. Almost a quarter of all ecommerce orders in the UK now are fulfilled in-store. The ad that we think summarizes this trend perfectly is Walmart as advertising free delivery if you come to the store and pick it up.
The biggest effect on the retail community of Amazon is it’s going to lower the margins of everybody in the room. They forced everyone to offer free shipping which is exceptionally expensive. Just in 12 months the percentage of packages that came with no attach fee went from 44% in quality of 2013 to almost two-thirds in 2014. So, some of our predictions, we said in 2014 that Amazon was developing the atom pipe of stuff in your house via Amazon Fresh. We actually revised that and we think in 2015 Amazon is going to make a transformative acquisition. We believe they’re going to acquire a JC Penney’s, a Sears, a Radio Shack, a gas station or petroleum company that’s going out of business. But we think even Amazon hasn’t been able to figure out this last mile problem and that they’re going to in some time in the next 12 months make an absolutely earth-shattering acquisition.
The music stops for e-commerce firms; we think it’s already happened we think the shakeout among pure-play e-commerce firms is already happening. The new arbiters, multi-channel and content and commerce, in terms of who are the winners and losers in traditional retail. We’ll talk a little bit about this. A lot of our days we’re talking about omni-channel but Content is Queen. This is our favorite chart from 2014 and it shows the percentage of offline sales that are influenced or touched by digital and we’ve reached a tipping point where more the majority of sales in your stores now are touched by digital before the consumer is in the store. And as you can see the lift goes up. If you can get someone to touch digital before they go into the store; greater conversion, greater lift. and if you can get someone to touch digital before and pull out their smartphone while they’re in the store, they’re actually going to spend more and have a greater conversion. It’s a myth that showroom and Hertz retailers, the best thing that can happen if you’re a retailer is to have someone pull out their phone. They’re more likely to find out that they’re getting it at a decent price and start looking at user reviews and buying more.
So, let’s talk a little bit about branded content. A lot of heat around user generated reviews and in fact branded content increases conversion and basket size more than any type of other content and we say branded content; only things like user reviews, video tutorials and the like. Content marketing is exploding; it’s the fastest-growing area of interest among retailers. But there are really only two things you should be thinking about when you build digital. We call it blue pill, red pill, or invest in digital. You need to either be putting consumers on a path where it’s purchased either offline or online, or you should be building your brands at scale. And the key term there is at scale. There are a lot of pet projects and a lot of platforms that are very seductive but when you apply hard analytics you see you are not building your brand at scale. This is an example of that. This is the traffic that the respective sites of these brands get and this is also the traffic numbers that their blogs get. A lot of these pet projects win awards that are exciting and they are absolutely destroying shareholder value. You want to go where the action is and integrate content into the commerce. And since World War Two, the majority of brands have bifurcated our retailers. What they think of as traditional brand building or content and then the dirty job of selling. The majority of luxury brands left the dirty job of selling to the department store channel and as more and more brands have become vertical, they’re still not comfortable with the notion of mixing content and brand and actual commerce. I call it the Fabergé egg effect, where there’s the marketing people who look at the brand as an egg, a precious thing. Only certain people can talk about it, you can only use certain words talking about the egg. If you smudge the egg or do something wrong, it could be a career-ending injury and the crazy farmers are the ones selling it but they don’t get the brand. The successful retailers are the one that ones that realize that if you mix content and commerce, it’s actually a very powerful algorithm.
So, it’s a basic question: does your strongest content sit somewhere other than your brand site? Is it a blog or a microsite that has videos and tutorials that are a dead-end or road to know where? Is your hardest-working content publishers or UGC ignored and do your top sales associates provide better customer service than your digital? Because now with different tools you can offer fairly strong customization and bespoke service online. We talked about blue pill, red pill.
So, we went out and looked at… we assigned a content score across brands and across regions and these are the brands that are doing the best job. Now even though Nordstrom and Lucky; it says that they’re regional, it’s because they’re not in very many markets. But what’s especially impressive is when a brand like Benefit Cosmetics and Beauty Division of LVMH has strong content across regions that’s consistent. And then here we’re looking at strong content, low variance, which is ideally what you want and you see some great global brands but there’s very few who are at the top. And what you typically see is strong content and high variance, where the country managers are not taking advantage of a uniform platform or sharing content of best practices ideas. And this happens again across some fantastic brands.
Why does this matter? If you have great content your convert on your site, your conversion goes up and at the end of the day that’s the whole reason we’re here: is to increase conversion basket size and traffic. That’s the only algorithm that increases online sales. And there is a correlation between your content score and your conversion rate, and these are the brands doing the best job and you can see the at the top: Sephora, Clarence, and Estee Lauder with fantastic content and higher the market conversion rates. Who are the biggest offenders in terms of omni-channel? Not driving people into store and then not using the store to drive people online? It’s hands-down, it’s our fashion cohort who do not do a very good job, seem to have very siloed efforts where the online professionals are compensated for the online sales and the store people are compensated for the full wall unit economics and they don’t speak to each other.
How many of you have looked at a Chinese site and thought wow they just don’t get it? I mean you look at these things, you think “God that’s just a nightmare” right? All that crap everywhere and you just look at them and go, “they just don’t get real Western sophisticated branding. They just don’t get it”. Well what happens when Western brands test with cleaner more traditionally Western branding, conversion drops like crazy. And we’re beginning to think that maybe it’s the Chinese that get it; that the consumer is fairly sophisticated. By the time they bought into your brand and showed up on your site in your mobile device, they want as much information as quickly as possible and want a clear blue line path to the information that helps them buy the product.
Another example of this just looking at retail and brands historically. In 1997, Levi’s was the largest apparel manufacturer in the world. The largest branded apparel manufacturer in the world, doing seven billion dollars in sales and it exploded that revenue over the course of the next seven years to four billion dollars. To give you a sense of the real-world effect of this, this means that about every four weeks they were calling in between 800 and 1,200 people and telling them that they were being let go. This is seven years of extraordinary pain. In a previous life, I built Levi’s first website and we used to sit around and stare at our navel and say is it a brand problem? Is it product problem? Is it a brand problem? Is it product problem? It was a couple things. One: the majority of their US sales were done through JC Penney’s and Sears. They had unwittingly entered into a suicide pact; when your core distribution is in decline, you’re going to go in decline. But also, they had a religion around separating content from commerce. They had amazing commercials, amazing. But then they stacked their jeans eight feet high and army-navy stores and there really wasn’t very strong content at the point of commerce. Now who is the company that saw the opportunity to mix content and commerce and came in and ate Levi’s lunch and went from 2 billion to 8 billion in the same time period? I think the Gap is going to go down as this kind of the seminal shift in content to commerce and they decided we can’t afford the content and broadcast so we’re going to build content into the commerce. We’re going to have beautiful bleached blonde wood in the stores, we’re going to control the sense, we’re going to have well-trained customer service associates, we’re going to have fantastic broadcast campaigns repurposed in the store. They were really the first specialty retail to say content and commerce should walk hand in hand and they added extraordinary shareholder value.
The death of impulse: I’ll go this through this very quickly because I have about 40 slides in 6 minutes and 6 seconds. But as you see foot traffic is now dramatically, and we’ll talk to Scott and Michael, but effectively foot traffic has been cut in half to retail in the last 5 years. People are becoming warriors, they’re doing research, surgical strikes, going into retail. As a result, the number of square feet being opened has declined dramatically. A lot of great CPG brands have figured out that they need to be in that first basket. This is this is the number of products available from some great CPG companies that are available at Amazon, subscribe and save, whether you effectively get to auto-replenish the product. Procter & Gamble is making a huge bet and that is the next year we’re going to have 50 million first baskets in grocery, for online grocery order, and they’ve decided they have to be in that first basket because if you look at the way we shop and we go into stores, we’re fairly promiscuous and open to new ideas with end caps and promotions but once you do that first basket in your online grocery order, you tend to just manicure around the edges. So, as a result they’re making these extraordinary investments in Amazon and emulating Amazon into their warehouses to fulfill.
Who gets hurt? Impulse. You got to think that the products that are mostly about impulse buys, get hurt. Because we’re going to have fewer opportunities to exercise those impulse muscles. So, everything from confectionaries to flowers to gift cards, and I also think this is the next leg down in print. More magazines are sold at grocery and at retail than we would think. And we tend to buy these thinking “Okay, I’m sitting here, that looks interesting. I’m very interested in Kate Middleton. I’m going to I’m going to pick this up”.
So, some predictions: a land grab for the first basket, impulse purchases down, and print will take its next leg down in 2015. And it feels somewhat sacrilegious to say that while standing here.
Who disrupts retail in 2015? So, people would say that Amazon has been the most disruptive force in the largest economy for the last ten years. But who starts to suck the room air out of the room in 2015 for retailers or who’s the biggest threat? I would argue that luxury brands have the most opportunity to hurt the rest of aspirational retailers because they have the highest margin. we have a tendency now to go for value or very high-end and also luxury has been the best business over the last ten years; they continue to innovate around online. So who is the best luxury brand in the world and who in fact is going to begin hurting the retail community at large because its business is going to be so strong? So, let’s look at what makes a great luxury brand. Craftsmanship, an iconic founder, exceptional price point, vertical control of your retail, mixing content and commerce, global in nature. Wealthy people are strikingly boring; they’re more similar to each other than any other economic class. They wear Hermes, they fly first-class on British Airways and they party in St. Barts. They look strikingly similar globally. They also, and I think this is a huge overlooked asset of any sort of wearable or intuitive luxury brand, and that is its self-expressive benefit; what does it say about you? Once we get beyond needing to, once we get beyond basic warmth, it becomes well what does this say about me? And do I feel good about the way I think it’s communicating who I am to other people? Self-expressive benefit. And luxury brands are the best in the world at figuring out how to make you feel good about wearing a product through a series of marketing and product benefits.
Apple is the best luxury brand in the world now. Apple has the design. It has the iconic founder. Exceptional price point. It’s the first technology product I’ve ever seen that’s been able to expand margins as the product matures. The iPhone is actually expanding its margins as it ages, which we’ve never seen in technology before. They’ve made an extraordinary investment in vertical. This is the general motor store. That store underneath the ground, below ground, is going to do about half a billion dollars in sales this year. Just that store. Vertical control, fantastic global brand, and they have made the transition, the transformation to the dark side is complete with the Apple watch. We knew they were going to be in luxury, just we just didn’t know where. Angela Aaron’s doesn’t move to Cupertino and give up a twenty-eight-million-dollar job to run stores. She goes there to make Apple at one trillion-dollar market cap company on the back of luxury. Apple would be negligent if it didn’t get into luxury assets. Right now, the best house in a bad neighborhood, that’s technology, it smells blood in the water. The luxury industry has raised its prices 8% per year over the last five years, faster than inflation, which has created incredible profit margins that are just too ripe to ignore for what is the strongest brand in the world.
And then self-expressive benefit. I don’t know how many of you have your phone with you, but if you’re carrying an iOS, it means that you’re wealthier and better educated than anyone here who is carrying an Android phone. This is this is a heat map of mobile operating systems. The red is iOS and green is Android. So, as you’re in wealthy neighborhoods, it’s all iOS. As you get into the suburbs and less wealthy households, it flips to green or Android. We talk about mobile commerce; it’s not mobile commerce, it’s Apple commerce. The iOS is responsible for four-fifths of all commerce taking place online. Let’s go to… oh and I love this. Jurassic Park. The purple is the bankers and lawyers holding onto their Blackberries in Midtown. This is Los Angeles. So, we have the suburbs inland, but what about the coastal areas and Hollywood in Beverly Hills? What does that look like? It’s all iOS. This this has become the ultimate self-expressive benefit brand in the world.
If you want to see someone in denial, talk to a watch executive and ask them what impact the Apple watch is going to have on their industry. They’re claiming it’s really not going to do much to their industry; that it’s a different product at a different price point. If Apple is able to get the similar penetration of the Apple watch they’ve gotten from new product releases, and that’s a big IF, this could be a huge bomb. This in its first year, if you look at supply chain orders, it’s going to be the largest watch company in the world. In year one. Imagine a competitor showing up in any category, and in year one being the largest player in the world. Who does it impact? It impacts everybody. It’s going to suck the oxygen out of the room, not only for watch players, but for other retail brands.
So, it’s absolutely going to hurt these guys. Teen retailers again are doing a lot of navel-gazing. What is it about our product or brand that’s not working? It’s not a product or a brand problem. It’s an Apple and a Starbucks problem. And that is other better brands are appealing to teen wallets better than teen retailers are. Same thing is about to happen with these brands as with the Apple watch. If there’s 14 billion dollars in new expenditures on a new product that didn’t exist before, and the phone grows another 10 billion, you have 25 billion dollars being taken out of the traditional brand retail ecosystem. People are going to realize about the middle of this year 2015 that things are just getting harder and they’re going to try and figure out why and they’re going to realize that people are just spending more at that brand called Apple. They have a huge advantage. So, online ordering, mobile commerce. Tiffany & Company was number two in our digital IQ in extra watches and jewelry and they’re very good at this. But look how clunky it is to order most products on your mobile device if you’re a retailer. Their in-store pickup is only limited to three locations. There’s no SKU level availability and the pickup option isn’t offered until the end after you’ve paid. So you really don’t know what’s available. Think about how easy Apple is going to make it to buy an Apple watch, between their stores. A very intimate understanding the operating system you’re on and this secret weapon called your credit card information, where you just press to buy something. Amazon has 300 million credit cards on file. Apple has 850 million credit cards on file. Think about what an advantage it is in terms of taking friction out when you don’t have to enter any information to buy a product.
Why is Apple the most successful company in the world? All of business comes down to two things. We like to think that we’re not animals. We’re absolutely animals. Our ant farm has Netflix and Chipotle, but we are animals. Business is about two things, appealing to two instincts: survival and propagation. And the majority of the world unfortunately has to focus on survival; they’re not really consumers. They have to think about basic shelter, basic education, basic foodstuffs. One third of the world, and it’s going to two thirds, which is very exciting, are consumers, meaning they can start to think about more than the basics and their desire moves further down their body. They start to think about propagation, or specifically they start to think about looking smarter, looking faster, looking stronger, looking more eligible, looking more powerful. I can take care of your young. I am the most attractive person to mate with. We like to over thank this. The basis of every luxury brand was based on this. Very, very core instinct that is second only to survival. Apple is the first technology company in history that has moved from the rational to the irrational. it’s the first company in technology that’s taking that massive base of innovation and figured out what luxury brands have figured out. And that is if you can get people to think with organs other than their head, they begin to make irrational decisions, and we love those consumers. We love consumers who buy Porsches. we love consumers who buy ergonomically impossible shoes for $700. These are the highest margin companies in the world. And Apple is the first technology company that’s been able to figure out how to tap into the instinct beyond survival, the propagation with what is now the self-expressive benefit brand.
So, some predictions. Apple will enter into the luxury business in 2014. We got that right. Apple will become the first trillion-dollar market cap company appealing to people’s desire for self expressive benefit. We believe the luxury boom and retail are going to hit a wall in the sense that Apple is going to begin to take share from almost every aspirational brand.
So, just to wrap up. Amazon has shown its Achilles heel. It’s going to be a very interesting year. we believe they’re going to make a transformative brick-and-mortar acquisition. the death of pure-play; everyone’s rushing towards the middle. The most successful retailer in the next five years. Who is the most successful retailer hands-down? It’s not Amazon, it’s Macy’s. The new arbiters of success and retail are going to be omni-channel. We talk a lot about that, but also the ability to weave content and commerce seamlessly. And also, we believe Apple is going to begin disrupting retail.
So, with that, our next speaker is Professor Arun Sundararajan. In academia, you’re evaluated basically on one aspect and that is the number of citations you get in peer-reviewed journals. and Arun is a scholar and has tenure at the Stern School of Business. but Arun is having his moment right now. and that is he has received more public press and media attention than any professor at probably of NYU right now because he was into the share economy before it was cool and is considered the top scholar in the world now on the notion of the share economy. So, Professor Sundararajan…