Managing Risk During the Retail Apocalypse

In Macy’s stores across the country, shoppers can now venture “Backstage” to purchase discounted clothing from last season or with imperfections.

While the store’s latest “innovation” may sound remarkably like shopping at Nordstrom’s “Rack,” it does offer an important glimpse at Macy’s strategy to save profitability.

After last year’s disappointing holiday sales, Macy’s tried offering significant discounts on regular merchandise, expanding Backstage locations inside its stores and amping up its loyalty program. But Macy’s sales have declined for 10 quarters straight and shares have dropped 50 percent this year alone. 

Macy’s isn’t alone. The retail industry overall faces high risk this year, experiencing a devastating onslaught of declining sales and bankruptcies that has been dubbed the Retail Apocalypse. In the first half of 2017 alone, more than 4,000 brick-and-mortar retail stores have closed, and analysts predict the industry will surpass its 6,000 store closure record in 2008 by the year’s end.

Against a backdrop of stock market and consumer confidence highs, retailers are puzzled.

“By all conventional thinking, we should be in a boom time for retail, but we aren’t,” said Bob Phibbs, CEO of the Retail Doctor, a New York retail consultancy.

More than a dozen household name retailers have filed for bankruptcy in 2017 so far, with some like Gymboree and Rue21 seeking reorganization, and others such as hhgregg and The Wet Seal opting for liquidation. As a result, retailers face a pressing need to identify, evaluate and mitigate risk to remain afloat.

Jim Wanserski, an Atlanta-based management consultant, and Sridhar Ramamoorti, associate professor at the University of Dayton School of Business, recently coauthored an article highlighting two breakthrough risk factors: the speed at which risk can become a full-blown crisis — the authors call this the “velocity of risk” — and a business’s capacity for a quick response.

Retailers are in consensus about their biggest risk factors for 2017, citing security breaches, government regulation and general economic conditions. Importantly, risk management can help business leaders pinpoint not only immediate responses but the likelihood of long-term survival.

“Do you have enough resources not only to take the risk [and] deal with it, but still … come out of the whole experience in a position to deal with your day-to-day business routines?” Ramamoorti said.

To remain profitable, retailers must look holistically at their current risks and challenges, ranging from rethinking store leases, to understanding their in-person competitive advantage, to using data to adapt strategically. 

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Rethink the Footprint

As a starting point, retailers should examine their physical footprint.

“There never was demand for all of the retail that’s out there right now,” Phibbs said. “Money was cheap in the ’80s, and [big stores] expanded to every exit ramp off the freeway.”

It’s not surprising to learn that the United States has significantly more retail space than other countries: last year Macy’s then-CEO Terry Lundgren told CNBC the U.S. has 7.3 square feet of retail space per person, compared to 1.7 feet in France and Japan.

Because building leases are long-term, retailers can be stuck in a location with changing demographics and declining customer traffic. For retailers with underperforming stores, addressing the surplus of locations and square footage is key, either by closing stores or finding a better lease.

In more dire circumstances, declaring bankruptcy can often be the best way to shed unsustainable leases, according to Rick Stover, a retired Big Four partner and current lecturer at the University of Dayton.

“You have 150 stores and only 50 are worth keeping?” he said. “You go into bankruptcy and let the court get rid of the leases.”

Revisit Store Offerings

Like Macy’s, other retailers are trying new strategies to bring customers into their physical stores. American Eagle Outfitters recently announced a new “Studio” store that will provide laundry services, and Kohl’s now offers Amazon returns at select locations.

Retailers’ experimentation can be a recipe for more risk, however.

“Retailers say ‘We’ve got to try something,’ ” Phibbs said. “And now it’s just like the Wild West.”

Trying to cauterize declining sales is reactive by nature, and retailers may not survive by expanding product lines and loyalty programs alone.

“When you’re always in a reactionary mode or hunkered down, you lose the ability to be innovative,” Wanserski said. “The pressure’s on and you’ve got to do something.”

But in a world where online specialty boutiques are drawing shoppers to their laptops instead of to their local department stores, retailers are finding that providing a wide range of products is no longer a sound merchandising strategy. Instead, Wanserski notes the importance of using data to strategically stock the shelves and create the best customer experience.

“Management teams need to really step back and look hard at their data,” Wanserski said. “They have to be far more nimble. You see something going south, or something that could take off, you’re just going to have to be there.”

But according to accounting firm KPMG’s 2017 report on top retail risks, most retailers are missing out on connecting those data points to actionable strategies, and instead are underutilizing data from their many collection points.

At the end of the day, Stover said, companies should go with what they know.

“The best companies go back to ‘What do we do well?’ and ‘Who wants to buy it?’ ” he said. “This minimizes risk.”  

Capitalize on the In-Store Experience

E-commerce is a major threat to retailers, and the specter of Amazon looms large over the industry. But U.S. Census Bureau data indicates e-commerce totaled less than 9 percent of retail sales in the first quarter of 2017.

For Phibbs, that indicates retailers must adapt.

“Amazon’s already a search engine attached to a warehouse, so what are you going to do?” he said.

Shopping at a physical store isn’t as convenient as shopping online, so retailers must leverage one of their most crucial assets to maximize success: their employees.

“I go to Nordstrom because of the customer service experience,” Wanserski said.

Online retailers have not yet found a way to match the human connection and personalized customer service of a well-trained store associate. Even when making moves to refocus their inventory, Phibbs believes retailers should capitalize on customers browsing in person.

Being “curious about why people walk into your store,” Phibbs said, is the starting point for understanding the customer and drawing more people to the store.

As retailers try to survive the apocalypse, they should optimize the key differentiator of an in-store experience.

“It isn’t going to be about the price,” Phibbs continued. “It has to be about what the customer feels when they’re in that store.”

Monitor Consistently and Adapt Quickly

With the current state of retail, businesses must move fast to understand and respond to areas of risk.

“After a while ... there’s too many things coming at you,” Ramamoorti said. Speed “is something that absolutely has to be factored into models of risk assessment.”

The reality of retail is that companies must implement change across their chain, sometimes consisting of hundreds of stores and tens of thousands of employees. But for Wanserski, it all comes back to key performance indicators.

“Watch key metrics — same store sales, profit by store, profit by region,” he said. “And that’s just the bare minimum.”  

Risk response strategy for retailers should be built upon the pillars of agility and resilience.

“The ability to bounce back after the storm has passed,” Ramamoorti said, “is equally as important as agility, which is the speed with which you can defend your company and its resource base.”

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