Keep Calm and Carry On

The poster with the slogan was issued in 1939 by the British.  We don’t have anybody bombing our cities or threatening to invade us- exactly- but the coronavirus is a national challenge with social, financial and health related impacts unlike anything most of us have experienced.  I’m not sure I’m overstating it to say that you had to be alive during World War II- maybe the attack on Pearl Harbor- to have had a similar experience.  The speed with which it has hit us is remarkable.    

I lived in Dublin for two years and I can tell you that when the Irish close the pubs, it’s serious.

I’ve watched stores close, brands lay off people, and inventory be put on sale at deep discounts.  I’ve also seen cooperation among brands and retailers and companies offering some level of support to employees that they aren’t required to provide.  If there’s anything hopeful it’s that we seem to be figuring out- more slowly than we should have- that we’re all in this together.  A little more national leadership would be nice.

You all knew, I think, that assets were overpriced and that there would be, someday/eventually, a recession and a bear market.  Something was going to cause it.  It happened to be the virus and who saw that coming?  Although, like with the recession, we knew that someday there would be another pandemic.

Those of you who thought the Federal Reserve had your backs now know better.  This is all happening with interest rates at the zero bound, way too much debt, political disfunction and big wealth gaps.

But we’ll get through it- personally and from a business perspective.  Maybe not quickly and certainly not without damage, but we will come out the other side.  How quickly depends on how much short-term pain we’re willing to bear to avoid longer, deeper pain.

This kind of chaos can offer opportunities.  I never expected it to be this bad, this gut wrenching, this out of left field, this short term destructive, but many of our industry’s problems with over supply, too many brands, lack of differentiable product, and too much retail is going to improve.  I have no idea if it’s good that it’s happening so quickly.

The world changed with the Great Recession back in 2008.  The recovery was weak and slow and, for many of our customers, nearly nonexistent.  For various reasons the jobs they found to replace the ones they lost didn’t pay as much and, in any event, real wages for much of the population had stagnated for decades.

The sales increases we’d come to know and love got harder to come by.  The consumer became powerful, demanding more but expecting to pay less.  The internet revolutionized your relationship with your customer.

If you recognized the changing business environment after 2008 you did a few things.  First, you focused on the quality of your brand even at the cost of some revenue because you knew brand value was all you had to work with.

Second, as part of your brand building, you were a bit more discriminating about your distribution. 

Third, you focused on operating income and the bottom line rather than sales increases.  That meant controlling your expenses by being more discriminating not just in how much you spent, but where you spent it.

Fourth, you yielded to the power of your customer and the internet.  I’ve never liked the word, but let’s just say you omni channeled and move on. 

That’s where part of that redirected spending went.  It also went, and is still going, to developing the systems you need to collect, analyze and utilize customer data as part of critical relationship building.

Fifth, you rationalized your supply chain to reduce costs and inventory requirements.  That may turn out not to have been a great idea, but around 2009, it seemed the right thing to do.

If you did these things, and aren’t a public company that borrowed too much money to buy back its shares to artificially increase your earnings per share (and now really, really wish you had that cash),  you might be finding yourself with a debt free, strong balance sheet that lets you survive this while certain of your competitors crumple.  That will be especially true if commercial interest rates continue to rise.

Even if you did everything I’ve described perfectly, it doesn’t mean the next months to year are going to be anything but hard.  It’s tough to balance the needs of an economy with the requirements of managing a worldwide pandemic.  The affects will be long lasting.  Think about how your parents or grandparents (depending on your age) changed their long-term behaviors as a result of the Great Depression.

This will impact your business in a variety of ways, and no doubt in ways I haven’t thought of.

  • Is the importance of online shopping going to accelerate and will that be permanent?  What’s the impact on existing retail locations?  One furniture store I know has closed, but if you call them you learn you can make an individual appointment to go to the store and have a one on one selling experience.  If you want it. 
  • Is fast fashion finally going to shrivel?  This seems to me to be consistent with the secondhand movement that’s become so mainstream.  You can’t resell something that was only meant to be worn three times anyway.
  • Disruptions in the supply chain, for however long they last, will also work against fast fashion.
  • Maybe I don’t mean disruption, but rather permanent change in the supply chain.  Will product be sourced closer to home?  Will 3D printing finally take off?
  • If some of your competitors fall by the wayside and you are making higher quality, longer lasting product, can you, in the longer term, raise prices and margins (hard to imagine that environment, huh)?  Does that mean fewer pieces in inventory?
  • If that happens, how will it change your relationship with your customer?  Upgradeable product? A warranty that allows for one reconditioning?  This could be a long list.  How else might you come up with new ways to build your relationship with the customer into the product purchase?
  • In the immediate future, how do you maintain your business structure and retain valued employees?  As I imagine you are aware, some industry companies have closed stores but kept employees on the payroll.  This is easier for big companies with solid balance sheets but it can’t go on forever.
  • How can you turn your communications with customers on how you’re responding to the economic and health issues into a positive thing?  There is a community of interests developing here you’ve probably never had with your customers.  But be careful.  I’ve been getting viral (pun intended) communications from various companies about how concerned they are and what they are doing, but many are from companies I haven’t done business with in an awfully long time- or ever.  Those are definitely something I see as junk mail.  

As I tend to do, I had collected some articles- mostly on retail- that I was thinking to share with you.  But those articles are suddenly prehistoric- from January and early February.

We’re all in this together in a way we haven’t been in a long, long time and facing a recession caused by a dramatic decline in consumer demand (70% of the economy).  Most recessions start with a decline in manufacturing.  Governments are going to throw an amount of money you won’t believe at this and let’s hope it’s enough.  But in the meantime, if brands/retailers, trying to compete, build bridges with customers and even their competitors and are mutually supportive with the goal of solving a common problem, I’m for it.

Keep calm and carry on.

And Now for Something Completely Different; Some Recommended Reading with Perspective on U.S. Economic and Financial Conditions

In 5,000 years of recorded history, there isn’t another known instance of negative interest rates.  Now we’ve got about $13 trillion of securities with negative interest rates around the world.  So far, that hasn’t happened in the United States, but don’t assume it won’t when we finally get a recession.

Money is a commodity.  It has a price just like oil, gold, wheat or any other commodity.  When the market isn’t allowed to set the price, bad things happen- misallocation of capital basically.  You know this if you’ve tried to save money and found that the only way to get a return above inflation is to make investments you’d really prefer not to make (How many of you remember 6% CDs?).

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Retail, Technology, Consolidation, and Unintended Consequences

This morning, the Seattle Times featured this article telling us that REI wage hikes for store employee announced last summer will be costing the company $24 to $25 million.  The company’s net income for its last complete year was $38.3 million.

Meanwhile, my oldest son sent me this article from Investor’s Business Daily, telling us that fast food purveyor Wendy’s will have self-service ordering kiosks in 6,000 restaurants in the second half of this year due to rising minimum wages and tight labor conditions.

I’ve been writing about the potential impact of 3D printing and other kinds of manufacturing technology for a while.  Here’s my article on the apparel manufacturing system Intel plans to introduce.

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Why Did The Great Recession Happen?

Why Did The Great Recession Happen?

If you’ve ever looked at the suggested reading list on my web site, you know that I read some stuff that’s not related to business and certainly not to our industry.  Not directly that is.  But I think it helps me understand the environment we operate in and perhaps get a perspective I wouldn’t otherwise get.

William R. White is an economist who was recently awarded the apparently very prestigious Adam Smith prize.  He presented a lecture when he accepted the prize called, “Ultra Easy Money: Digging the Hole Deeper?”` Read more

Minimum Raise Increases: They Do Have an Impact- and Not Just on the People Who Get Paid More

I was reading Zumiez’s 10-Q and conference call and came across a question from an analyst (Sharon Zackfia from William Blair) on labor scarcity and wage pressures.  Here’s what she asked:

“I guess I’m curious from a labor standpoint kind of as labor gets scarcer and scarcer and wages are going up, how — what if anything that you’ve been able to do at a store level to kind of optimize that labor better, given the compression in your seasons?”

Zumiez CEO Rick Brooks’ got me thinking and detoured me from my usual review of their results- which I’ll get to after this article.  Let me quote Rick at some length.

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The Impact of Market Consolidation

We’re all watching the continuing rationalization of our retail space.  I suppose “rationalization” is a way too benign sounding word for a process that includes bankruptcies, store closings, job losses, margin hits, too much inventory, and struggles to increase sales and even to stay in business.

As ugly as this continues to be, there are going to be opportunities for the brands and retailers who get through it.  I’m going to take some comments from Dick’s Sporting Goods most recent conference call to help us think about the upside and downside of the process.  Dick’s, I suspect, will do just fine over the medium to long term because with the demise of The Sports Authority, there just aren’t that many larger, national big box competitors left (Academy has like 200 stores in 15 mostly southern states.  Who else?).  Dick’s ended their most recent quarter with 647 Dick’s stores.  They also own Golf Galaxy and have some Field and Stream stores I guess.

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Retail and Brand Strategy: Cycles or Long Term Trends?

Could this time really be different?

Recently, a couple of retail CEOs have been pointing out, or maybe bemoaning, the lack of a strong retail trend. They’ve noted how in the past they’ve been able to rely on such trends for big sales boosts and have explained their worse than expected performance partly by the lack of it.

They say, “But that will change.” I’m sure they are right. It will change.   Their implication, however, is that this is a traditional retail cycle of relatively short term duration. I’m not so sure about the “short term” part.

It’s a bit awkward for me to be asking, “Could it be different this time?” because I’m very aware of the cycles of history over decades and centuries. I know that in retail cycles, not to mention social, economic, and financial cycles, it has mostly turned out to not be different.

I’m going to compromise with myself and say it’s probably not different, but the time frame during which that becomes clear is going to be longer than we’re used to. The factors that are coming together guarantee a long, strange trip as the tidal wave of divergences works through our retail market. I’m going to look at what those are and try to reach some conclusions about succeeding in our industry.

Let’s start with overall economic conditions and debt then move on to customer behavior and how we sell to them. Next, I want to take a look at technology and what that means to the competitive environment. Based on that, I’ve got some ideas about how retailers and brands have to operate.

It IS the Economy, Stupid

I don’t think I need to spend much time trying to convince you that this economic recovery has been weaker than any since the 2nd World War. You are certainly aware that wage growth has been low to nonexistent and that job growth, especially for our primary customer group, has tended to be in lower paying jobs and often involve multiple jobs. Let’s call that group the millennials, though you’ll see below I think that’s an over simplification. When can we expect improvement?

Not for a while, and the reason is debt. I’ve recommended a book called This Time Is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff. It’s so well researched that it’s hard to dispute their findings, but they are hardly the only ones acknowledging the problem debt is causing. Basically, they show that debt over a certain point leads to lower growth in an economy.

They suggest that growth starts to be impacted when total private and public debt as a percentage of GDP reaches around 90%. As of the start of 2015, by way of some examples, Canada is the cleanest dirty shirt at a bit less than 300%. The U.S. is about 375%, the Eurozone about 475%, the U.K. 500% and Japan, the hands down winner, is north of 650%. What probably won’t surprise, but should disturb you, is that total debt has continued to rise since the Great Recession.

I’ve always found the idea of fixing a debt problem with more debt perplexing.

Meanwhile, take a look at this chart showing real GDP growth in selected periods in the U.S. 2000 is the year the stock market bubble first burst. To my way of thinking, though the Fed stepped in and “saved” us, that’s when things started to go south in a noticeable way.

GDP chart for Retail and Brand Strategy article for TWB 1-16

















I borrowed” this chart and the data in the previous paragraph from Hoisington Investment Management’s review and outlook for the third quarter of 2015. You can get your own copy at I highly recommend it.

I’ve studied enough statistics to understand that correlation does not necessarily equal causation, but I’m convinced that there’s a relationship between GDP growth and debt. It is kind of logical. If you owe money, then you have less to spend while you pay it back and pay the interest. If you choose not to pay it back, then the people you owe it to have less to spend.

I think we’re in a low growth period until we do something about our overall level of debt. Solving the problems will be unpleasant and, if avoided long enough, draconian. Please, please, please, email me and tell me why I’m wrong.

So the first thing we have to deal with is continued slow economic growth caused by over indebtedness. Let’s move on. I don’t have room for a good rant on the damage the Federal Reserve is doing with continued low interest rates.

Our Customers

Our customers are, uh, wait a minute. Who are they anyway? Seems like we, as an industry, are trying to sell to everybody from six year olds to baby boomers. A couple of individual brands seem to succeed with that, but mostly you can’t. I’ll spare you my oft repeated speech about the dangers of expanded distribution except to remind you that 1) growth requirements make it hard to be a successful public company in this space because of the requirement for regular, quarterly growth and once you get into broader distribution 2) they may know your brand but not your story and your competitive advantage goes away and 3) we’re way over retailed with too much indistinguishable product.

I also wondered a while ago if maybe distribution didn’t matter due to online and because good merchandising could overcome wider distribution. To summarize, I thought that once a product was ubiquitous in the online world and a click away, customer’s reaction to broader distribution might change. I’ve decided the answer is “no.” It turns out that getting retailers who’ve never been great at merchandising specialty product to do it well is expensive, challenging and time consuming. There’s also our continuing problem of a lack of product differentiation which poor merchandising just highlights.

Meanwhile, back to our customers. If we have to characterize them as a demographic, we’d say, “the millennials.” This is the group (much like my mom’s generation who’s formative years were in the Great Depression) that got slammed by the Great Recession. They are financially conservative (and will be for life), are having a hard time making a wage that allows them to live independently, are not particularly brand loyal (though if you can get them, you can keep them), are most influenced by their community (not your advertising), and are more interested in experiences. A product is something they seek in order to have an experience, rather than buy for the hell of it. They have the data to find exactly the right product with exactly the right attributes because they don’t want to screw up the experience. Don’t try and bullshit them.

Okay, now that I’ve defined our customers as a demographic, I have to tell you not to do that. In the days of instant, endless, information about anything, groups, trends, styles, points of view can come and go pretty damned quickly. And anybody who’s interested in them can find out about them and be part of the community they represent. It’s easier to say your customer is of a certain age, and it may be true. But it’s not an adequate description of who they are.

Notice how the term “fast fashion” seems to have disappeared? It’s like it’s no longer an aberration, but a permanent condition. This seems to require that companies be a bit reactive after all those years where being proactive was a virtue.

To go with a soft economy, then, we’ve got customers that are harder to get and keep and in general have less money to spend. I am just a font of good news today.


 Let me remind you of two things I hear brands and retailers saying all the time.

“Get the right product to the right place at the right time,” and “Give the customer what they want, when they want it, where they want it.”

Those two catchy phrases make a lot of sense and are indicative of two things. First, they tell us how much the customer is in charge. In the days of too much retail space, too many undifferentiated products and near perfect information, that’s probably inevitable. Second, we’re all trying to figure out how, exactly, to do this and the one thing we’ve learned for sure is that it’s really expensive. There’s an advantage here to big players with strong balance sheets, because the cost for a 50 store retail chain to do it is probably not that much different than for a 600 store chain. Let’s put it this way- the cost per store is lower for the larger retailer or brand.

When you accomplish it, you won’t have created a long term competitive advantage; you will have just bought yourself the right to compete. I’m not talking about using a POS system here. I’m saying that from design at the brand to returns at the retailer the systems have to be integrated to keep up with the speed and requirements of your customers.

My Hero

Maybe you remember that a couple of years ago Rip Curl got itself in trouble. They tried to sell the company, but couldn’t get the price they wanted. So they decided to solve the problem the hard way.

They refocused on just being the best surf company they could be. They cut their product offerings by 50% and focused on the ones that their customers needed. They try to offer technology and quality that differentiate the products they do sell. They emphasized efficiency and reduced their distribution. They only sold places where they could make money. What a good idea.

In summary, their primary focus was on improving net income (and reducing working capital invested) rather than gross revenues.

It seems to be working, and regular readers will know I thoroughly approve of what they decided to do. Bluntly, I don’t think they had a choice. And neither do many of you.

The economy is making fast revenue growth difficult. Your customers (who can’t be simply identified as an age group any more) won’t buy what you tell them to buy, but what their community supports. They have endless choices and information. And the continuous investment required to satisfy their product and shopping requirements has gone through the roof- especially for smaller brands and retailers.

Do some surprising things. Perhaps completely outside of what your customers expect. Even contrary to your brand image. If you accept my premise that it’s tougher to get and keep brand loyalty in the days of endless, instant new brands, and that’s it’s damned near impossible to keep up with what’s “cool” anyway, why not surprise your customers this way? It’s a way to claw back a little initiative and not have to be reactive all the time in an impossible attempt to keep up with the rate of change.

Especially as a newer brand, focus on your web site and selling there. You can’t find the customers- they have to find you. Social media, etc. This minimizes marketing costs. What you do spend should be aligned with creating experiences. If you’re not going to grow revenue as fast as you once might have, make sure you’re selling at a price that gives you a solid gross profit. In your brick and mortar retail, be very cautious about whom you open and curate the hell out of them until you know they have you figured out. Do some temporary stores in surprising places for strange reasons. Never over supply.

It’s really a pretty interesting time to be building a brand as long as you acknowledge what I think are longer term conditions under which you have to operate. Rip Curl can watch some of its competitors flail as it just focuses on the bottom line with a business model that’s responsive to existing business conditions using some of the concepts I’ve briefly described above.

You can do the same thing.

Lowe’s New Customer Service Representatives and the Minimum Wage

Lowe’s new in store service representatives won’t need bathroom breaks, vacations, or retirement account. They won’t get sick. Hell, you don’t even have to pay them a salary. And what’s even better, or maybe worse- I’m not quite sure- is that they may be able to help me find the esoteric piece of hardware I need better than the current human ones. And they will be able to do it in as many languages as are necessary.

They’re robots, and you can read about them here. Make sure you watch the video. Read more

What Does the Data on Our Target Market Say About Your Business Strategy?

It was a lot of years ago when I first started reminding you not to focus just on your gross margin percentage, but your gross margin dollars as well. Then, in 2009, with the recession in full swing, I got all excited about Gross Margin Return on Inventory Investment (GMRII) after Cary Allington at Action Watch pointed me to the concept.

I discussed it in some presentations and wrote about it. Here’s one of my articles on the subject. It’s held up pretty well.
I liked the GMRII concept because my reading of history is that debt caused recessions (if recession is an adequate word to explain what we’re going through) last a long time. This one, I concluded, was not going to be different from all the others. It seems, unfortunately, that so far I’m right about that.

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What Happens If (When?) Apparel Prices Rise?

We sell a lot of apparel. It’s where we, as an industry, make somewhere between a lot to most of our money. We’ve benefited over many years from apparel prices that have risen slowly if at all, and certainly more slowly than inflation. This article demonstrates that. It further tells us that apparel prices have started to rise and that they may rise more in the future. 

The increase is due to rising labor costs in China, and the cost of inputs, especially cotton. What happens if the cost of getting a garment made continues to rise or even does some catching up with general price levels?
We’ll do what we can, of course, to keep that from happening. You are all aware of some movement out of China to lower labor cost countries. However, you’ll note in the article how much apparel still comes from China.
We’ll try and pass on some price increases to consumers, but that has its limits. Especially in this economy. Perhaps it’s an extreme example, but you may recall that UGGs tried to pass on a big increase in sheepskin cost to consumers and the consumers wouldn’t accept it.
I imagine we’ll cut the number of pieces we make with the goal of increasing volume per style. That’s already happening at some companies and it’s my longstanding recommendation that you take a look at your SKU numbers anyway. There’s money to be made there.
We’ll try and substitute cheaper materials without sacrificing quality. We’ll design for easier manufacturing.
We can look hard at our customers and try to figure which ones are, or are not, sensitive to price increases and why. Your dream is to have a customer who wants/needs your product so badly that price doesn’t matter. Mine too.
You might find yourself taking a hard look at your distribution as price increases can mean that certain products will no longer be competitive in certain channels.
I can’t help but notice that these are all good things to do anyway, and I hope they are already part of your normal business processes. Let’s hope apparel prices stay under control though, of course, “hope” is never a valid strategy.