Aug 31, 2018 12:55:39 PM
Bob Phibbs interviewed Paula Rosenblum Managing Partner and co-founder of Retail Systems Research. She is well known for her pragmatic approach to retail and talks about shiny object syndrome, possible cracks in Amazon's model and how retail continues to evolve.
• You overbuy because you don't want to disappoint the customer.
• Off-price is not something new
• Off-shoring has created bland and boring retail due to longer lead times.
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Paula: I've been in retail my whole life. My father was an independent retailer. And I used to go buying with him back in New York, and I used to stock his shelves, so I started really, really young. I stumbled into retail IT probably a long time ago and rose to be CIO. I left CIO-dom in 2001 and became an analyst in 2002.
Bob: Is that a word, CIO-dom? What did your dad sell? Was that a summer job or...
Paula: No. My father was in the rag trade, you know, so he sold garments. And then, he was also in an official camp outfitter. And it used to be a blast to go buying with him because we lived in New York. A lot of the guys who sold the things that they asked you to bring to camp when I was a kid were down on Lower Broadway. We'd go into all these places. It was really kind of fun.
I graduated high school six months early and didn't want to go right to college. I worked in the store about three-quarters of the time for about six months also.
Bob: Well, that's interesting because your dad was in apparel, and let's face it, you're one of the best known retail research people around. I don't get the chance to pick your brain very often. So in light of that, how do you think things would be different if your dad was still in that business, assuming there was a market for it and he still, you know, and all that kind of stuff. How would it be different with the information we have now compared to when you were going out on buying trips back then?
Paula: That's a really interesting question. My father retired in 2008 and he resisted any attempt I would make to get him to computerize his store which was kind of funny. I can tell you that as a general rule, independent retailers work too hard, and they also are prone to over-inventory their store.
Bob: No. Really?
Paula: Yes, I know it's shocking. And no matter how many times I persuaded him that inventory wasn't like wine that didn't get better, he just kept it and kept it. And it was sad because I almost knew the exact number he was going to get when he finally retired and auctioned what was left.
Bob: Oh, my goodness.
Paula: Yes. Because, you know, it's 10 to 15 cents on the dollar. That's pretty much the standard.
Bob: So you've been there, why is that such a common occurrence because it's the same thing ? I do a Facebook live video every Thursday morning and invariably, every other week, someone asks, "How do I keep a small store from looking cluttered?" It's simple, "Well, don't buy so much."
Bob: But why is that? Is it that we don't have the tools that you would if you were a Target or a major...dare I say it, J.C. Penney? Whoever has to look at it and say, "Hey. This has to move out" and make those tough choices. Is it because it's a tough choice or because we get wed to the merch and that if I somehow discount it, it means I made a mistake? What do you think?
Paula: I think it's two things. First of all, you overbuy because you never wanna disappoint the customer. If you give store managers the ability to control their inventories, they will over-inventory as well because they never wanna be in the position of saying, "I'm sorry. I don't have it." So that's one thing.
And the second thing is yeah, they absolutely fall in love with their product. Which is why if we push out to a macro level, that's why markdown optimization got so hot because it finally forced the issue that said, "Look. Do you want to keep this stuff forever or do you want to sell it?" As a technology, it was really groundbreaking because it took the desire to be in love with your product off of the buyer's hands. I think merchants fall in love with the product and they think that it's gonna come back in style some time.
Bob: Do you think that that's changed the way we look at the buyer, too? Because you might have hired a kind of a quirky or goofy or funny or fill-in-the-blank buyer who really knew her stuff. Do they have the chance to really let that personality go and is that what's leading us to bland and boring retail?
Paula: Actually, that's a bigger question than that. I think what's leading us to bland and boring retail, and this is not a pitch for tariffs at all, this is just that statement of fact, is that all of the offshoring we do, all of the sourcing so far from the point of demand drives us to make bigger bets as retailers. And when you make a big bet, unless you really are very, very nervy, you'll place a safe bet. And when you start adding up all these safe bets, what you end up with is very boring assortments.
Bob: You know, that's brilliant. And not only is that in the traditional department store market but, you know...what was it, H&M had $4 billion of unsold fast fashion?
Paula: I know. And they were the ones who were supposed to be the best. And ironically, there was a time I worked for a material handling company, STI Industries, in my career, which was kinda fun. I learned when I hung around the department stores back then, was it used to be one and done. They didn't do a whole lot of replenishment. But that's changed, and the bets have just gotten bigger and bigger instead of smaller and smaller.
Bob: Who do you think is the retailer that's doing it right now? I mean, besides Sears and J.C. Penney.
Paula: They're the best.
Bob: They have Shop Now. Shop Now or Ship Right Now or whatever.
Paula: Yeah, Shop My Way or something like that. That's very sad. Actually, the Sears story is sort of tragic. When push comes to shove in American institution, that was the first Amazon with the old technology and distribution has been driven into the ground by greed, and that's really sad. Who do I think is doing it well? Everybody loves REI. I do as well. I like Nordstrom, and they have twice yearly sale. They've started falling a little bit into the markdown trap but... we have that additional challenge now which is that we've trained the consumer, as retailers, to wait for the sale. And so we've got this promotion-crazed environment, and that makes for an additional mess.
Bob: Yes, Just look at Macy's and some of the other ones that seem to have a tough time getting through that. And I think that's extending into smaller retailers and regional chains as well. Because the way I say it, Paula, is that I think we are pretty much paying people to have a horrible experience and come shop at our store and take this scrap out of here, instead of let me entertain you, and we'll have a good time. And let me show you that you lost 50 pounds, so let's look like a million bucks instead of find something to cover your smaller butt or to get away with whatever was last year's sale. You know, that brings up another topic.
Off-price seems to be growing. I read that Dollar stores sales are up 10% and TJ Maxx and Coles. Are we really becoming just two markets, full price and leftovers? Or is there some room in the middle, do you think?
Paula: I do think there's room in the middle. And off-price has been hot since really it came into being. When Marshalls was still separated from TJ Maxx, I knew guys who worked there. My old boss actually had left Marshalls. And they were bonusing out so high based on plan that that had changed the bonus structures because they were making so much money. Off-price is essentially a treasure hunt in some ways, remains hot forever. Ross Stores seems to be doing well. I mean, that seems to be perennial.
Dollar stores are a different phenomenon. Dollar stores are much more I think about Walmart. By the way, the only exception I believe was Dollar Tree. Dollar Tree didn't have a great quarter. Everybody else did. And I think that what they're doing is they've been nibbling at the edges of Walmart's market basket for several years now because they'll offer a brand that'll add up at a promotional price and it's pretty easy in and out. And they've been doing quite well here.
Bob: Well, they've changed the shopper behavior, right? That's kind of the challenge. What do you think for you, as a market analyst, what do you think has been your biggest challenge in the last three years and how did you overcome it? I mean, I would think it would be data overload myself, but you live on data.
Paula: Data overload doesn't bother me. What does bother me is what we call bright, shiny objects disorder or BSOD. Sometimes, vendors get out a little too far ahead of the retailers, and they start talking about technology that's looking for a solution. And they show it in NRF, and the retailers just shake their heads and go, "Well," especially if you're senior management, "this has nothing to do with what I do. This isn't something that I want."
I'm working at the moment on our fifth annual benchmark on the Internet of Things. What we are continuing to learn is that retailers love it, but they're not quite sure why. And they believe it's going to transform their business just as they believe AI is going to transform their business. And they're not quite sure why. And that's my biggest challenge because my company, RSR, our reason for being, is to be the pragmatic voice of sanity in the retail industry.
Bob: Yes, and you are.
Paula: That's very kind of you to say. We don't look at technology in a vacuum. We always look at it in the context of the business issues and opportunities retailers face. We appreciate that Amazon has created disruption in the industry because of their insanely broad assortment than anything else. None of us could live on the profits that Amazon doesn't make in its retail operations.
Bob: Thank God they've got AWS so they can, right? Now, they're gonna ramp up marketing to be able to take on Facebook and Google and another profit source, it's fascinating. There's just nobody like them in the world.
Paula: Well, but they are actually I think under some profit pressure. Everyone is fond of saying that the reason Amazon lost money was because it spent so much on R and D. My opinion has been forever that the reason they weren't making money in retail was because their assortment is so broad that figuring out how to package and box it and getting the right size boxes was almost impossible for them. I've never seen anybody ship as much air as those guys do, ever, in my career.
Bob: That's true.
Paula: What they've done is they've created this concept called third-party Prime. And that means that the product is being fulfilled by somebody else. Now, what that does for Amazon is it takes all the shipping costs off of their shoulders. It becomes pure profit just like the Marketplace is pure profit.
And sadly, I don't believe and I've actually asked rather nicely, "Show me where my data is wrong because it's all anecdotal." But there's more and more grumblings about third-party shipments being late. And in fact, I just got an email today about a product that's late...first, they told me it was going to be late. Then, they told me it was delivered and there's nothing here...and nobody steals from my porch. They're starting to come down to earth with the reality that they're gonna have to make money. And whenever you have to make money, you end up cutting corners somewhere along the way.
Bob: Sure. Well, I want to come back to Amazon in a second. I had to give you my favorite Internet of Things shiny object, which was the guy who came up with the tea kettle that you could start with your smartphone.
Paula: Come on.
Bob: I was like, how does the water get into it? Well, you put the water in it, and then you walk away. It's like, "Ah, okay." So Amazon, you and I were commenting I believe on an article at LinkedIn and about this dangerous world of price optimization algorithms between Walmart and Amazon and how they fluctuate so much. And in fact, you even talked about I think your self filters, how when you look at pricing transparency, it was crazy how much it was all up and down. But you only saw this is bad all the way around. Can you elaborate on that a little bit?
Paula: It was actually pool filters. And pool filters are an interesting subject because they're a replenishable item. I need them all the time especially in Miami where I live. I use them year-round, and they're not cheap. It's not like a can of pea that if it's 20 cents or 25 cents, I don't much care because I'm a relatively affluent person. But it's pool filters and they used to be $65 in the store. Amazon got them down to $55 somewhere along the way. At some point, I saw one for $45, so I put one on an alert through an Amazon price monitoring site, telling me let me know when it hits $45 because I'm willing to pantry pack them.
And I forgot about them actually because I hadn't gotten an alert in so long. I thought maybe they didn't exist anymore. And all of a sudden, I got an alert, and the price was down to $40. And they showed me this trend of what had happened with the price over the last couple of years. And the price ranged from $62 to $40, and that's real money.
Bob: That's significant, yes.
Paula: Even if you're relatively affluent, you don't want to feel like a jerk. I bought it,but I looked at that chart and I thought, "You don't really want consumers to see this. This is not such a good thing. This is gonna hurt you really badly." Because one of the most important aspects of a relationship between a retailer and a shopper is trust. And companies like Amazon and the Whole Foods, which is now part of Amazon, their stock-in-trade is trust. I mean, if you didn't trust Amazon, you'd never just push the Dash button, which is another topic for another day.
Bob: Or allow them to deliver groceries to your trunk, but that's another topic, too.
Paula: Exactly. And you certainly wouldn't say, "Alexa, order me a whatever," you know, without even looking at what the price was. And so the fact that they're jittery, which is the word I use for them, it's not good. It erodes the consumer trust. Along with this mammoth assortment, that's their biggest stock-in-trade. And when you start checking around, and I use the example of the pool cell, you find out that there are companies who are selling for almost half the price of Amazon on a given day.
Bob: But that also means that it is a giant race to the bottom, doesn't it? Isn't that what we've been saying for, I don't know, 20 years?
Paula: It is. But you know, you wish it wasn't. I would love to see a return to everyday low prices with promotions. That's fine. And if I choose to wait for the promotion, I'll wait. And if I choose to get it at that moment because I need it or whatever, that's a choice I get to make.
But this, where we've got this...don't forget we started talking about the sea of sameness which means there's very few must-have products with the exception for some reason of the $999 iPhone X. There's very few unique products that are, "I must have it. I don't care how much it costs"...and price wars are going on pretty endlessly, and that's bad. That's not good for our industry, and it makes me sad because I've been in it so long.
Bob: How has the way you thought about retail changed, you think, in the past, let's say, five years?
Paula: I used to talk about retail time in very glowing terms because retail is a dynamic industry. And retail time always seemed to be really fast compared to everything else. What's happened over the past 10 years really, is that compared to consumer time, retail time has become much too slow. And what's got to happen is we have got to, as an industry, get faster, we've got to get smarter, and we've got to get more interesting for consumers, for sure.
Bob: I would agree with you. I think the exciting things are the things that we're seeing. I think we're actually moving back to a time almost like of the pilgrims, Paula, where someone comes up with their little craft brewery for the local business and someone else has their little haberdashery and someone's got their little restaurant.
But we're past the '80s when we're all going to read the E-myth and build all these processes so we can be the next Starbucks and we too can be a giant world brand. I don't see that. It seems like we're being conservative...not conservative but more realistic. But also, I think that gives us the chance to really again curate the assortment and [inaudible 00:19:35] and also come up with a much better customer experience for shoppers rather than, "Come in and get this sale because we treat you so badly." Does that make sense?
Paula: Absolutely. I mean, that's the key problem with department stores right now is that they're really hard to shop because nobody wants to shop by department. They want to shop based on their lifestyle. And whether it's within a big box or not, I mean if you're going to shop by vendor as a proxy for your lifestyle, then you might as well just go to their stores because everybody's got their own stores now. The biggest challenge is creating a curated multi-brand assortment that consumers will really get behind. I believe that.
Bob: I would agree with that. Urban Outfitter seems to do a decent job with lifestyle presentation, would you agree?
Paula: Yes, I would.
Bob: What would you say to a friend who is looking to go into retail and said, "Oh, I'm giving it all up, Paula. I'm gonna open this retail store I've been dying to do all my life." What would you tell them?
Paula: I would tell them expect to work hard. Expect to not have weekends, but expect to have a heck of a good time.
Bob: Nice. I love that. Well, we're towards the end. Tell me something good about retail. I mean, we work in doom and gloom unfortunately only because we see a lot of factors. And let's face it, it's like any business, the squeaky wheel is what people hear about, right? Another day of horrible earnings from so and so and this, this. But, you know, tell me something good about retail.
Paula: Well, I think right at the moment, I think consumer confidence is high, albeit fragile. I think that retail is one of the most exciting industries you can be in because it's always changing. It's consumer driven, which means it's very, very important to the economy. I think it's a great career honestly. I think learning to be a buyer, learning to be a merchandise analyst, that's a great gig. I really do.
Bob: And how can they find out more about RSR and your services?
Paula: Well, we have a website. It's RSR Research, an extra R just because we want confuse everyone. And they're more than welcome to come. We just published today our most recent benchmark on the state of the store, which is really kind of interesting. It's a hot topic at the moment.
Bob: Can you tease us with one thing from that report?
Paula: Well, this isn't so new news... But the employee has become more and more important. Otherwise, why would you go to a store, right? And retailers recognize it, and they get it and it's really clear. So you can expect that retailers are going to be spending more money on their employees over the coming years, and I think that that's a good thing especially if they find ways to empower them with technology and also train them.
Bob: And that's where I come in to help train them. So I appreciate that last way that we connected the dots, Paula. And with your data and my training, I think that again retail is a great place. I honestly believe we can change the world by the people working and shopping in retail. And I appreciate you joining me and sharing your story, from starting off in your dad's store there in New York and all the way up to one of the great analysts in retail right now, letting us know what's going on. I appreciate you joining me today, Paula.
To find out more about Paula and RSR Research, go here.
Episode 115: Paula Rosenblum |
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