Retailers are from Mars
by Guido Schild
A look back at around 50 years of “brand goes retail” reveals a path paved with unsuccessful attempts to grow. The newest prominent entry to the list: Apple (s.our blog). Brand retail strategies were diverse, but annual reports tell a familiar story: none of the major midmarket brands has really made it. As Polo Ralph Lauren (retail launch: 1971), Nike (1967), Levis (1983) or Esprit (1986) can attest, even experience is no guarantee for success in retail, or crushing setbacks.
Though retail strategies vary, the stumbles bear an uncanny similarity: in early evolution phases it is an underestimation of risks, while later evolution show conflicts of cultures – clashes between ‘typically’ emotional brand cultures and ‘typically’ straightforward retail cultures, conflicts that correspond to the cliché of men and women.
US relationship counselor Dr. John Gray has possibly provided the key to understanding why retailers and brands have difficulty getting along under one roof. Gray’s entertaining bestseller from 1992 “Men are from Mars, Women are from Venus” offers interesting insights into the gender differences. After working with US, European & Asian brands for some years, it is our strong believe: The metaphor of Venus & Mars applies equally to the cultures of brands and retailers – and it may explain why no major midmarket fashion brand has yet successfully gone from wholesale to retail all the way.
Brand falls in Love with Retail
A wholesaler’s entry into retail is usually evolutionary. The department store manager ask for a shop within the store to highlight the brand on the sales floor. After a few seasons, wholesaler’s desire to show the brand even more prominent grows. Monthly visual merchandising services are introduced alongside never-out-of-shelf service (NOS) and fashion flash programs, all with the aim of gaining a larger area of the department´s sales floor. Over the years roles and responsibilities between buyer and supplier change, and the brand takes more & more control of the sales floor.
Contributing to this structural development, brick & mortar multi-brand retailers are losing market share. In Germany alone €250m annually (see findings of our German Multibrand Study 2012). In this environment, brands gain a growing desire for standalone owned and operated stores, as just another very logical small step forward.
After getting off to a good retail start, it is usual to charge ahead with adolescent dynamism, in multiple regions same time, free of all (retail) rationality. To understand why this it, one has to understand brand & wholesale cultures. Testing new lines, new categories, new assortments in several markets simultaneously by local brand managers is part of wholesale DNA. So why not test retail in many countries same time? So the organisation copies what it successful in first place, it opens stores dynamically without a manual or centrally standardized processes – Retail implementation is left to the local agent in Japan or country manager in France. Global brands never grow retail in a structured, organized manner. They grow organically, like a biotope, different in different environments. The local markets „dictate“ the structure, not central headquarters.
Venus meets Mars
Wholesale country managers who take on retail the “Venus way” don´t feel any wrong, if they do it „their way“. Purebred “Martian” retail managers, however judge a brand’s retail move as pure chaos: 15 stores on three continents in 24 months, each one different. No piloting, fine-tuning and just “gold rush” retail expansion? What a nightmare!
Retail “Made by Venus” is retail without manuals, investment control or standard processes. It is organised by 15 local store managers, all coming from different backgrounds. When they arrived at the brand their new employer had no retail standards, so the store managers bring tools from their earlier positions (in UK from M&S, in France from H&M…). Standards are born on Mars, and Venus Managers don´t understand them. The brand culture of emotion, spontaneity and lightness calls for the creative freedom . Hired store managers, merchandise planners, even visual merchandisers, all go through a chaotic, unhappy youth as without standards, they have to organize everything themselves, until the day Venus realises retail doesn´t become a successful business. It becomes apparent things have to change and central retail functions are introduced. A few stores are closed, but then expansion continues with the same vigor, partly without learning. Hard to believe, considering burned investments? Just look at ten years of annual reports of Hugo Boss, Geox or Esprit. You’ll find years where 80 stores are closed in a single year, yet 50 new ones opened same or next year.
Where Martians scratch their heads, Venus doesn’t mind dieting, only to put on weight again in just a few months. People of Venus have learned in their wholesale lives, “if it doesn’t sell, rework it to something more attractive and next year it will sell.” This is the nature of wholesale assortment management and branding.
“Born” retailers are different
“Born” retailers can’t imagine why anyone would decide that a format that has failed to deliver a 2-year payback deserves another try for 50 stores, just because of a facelift. On the other hand, hardly any of the born retailers proved to grow globally. Purebred retailer “expand around the church”, from New York to New Jersey, but not from New York to New Orleans. They grow with a standard store DNA that has the same format and assortment mix at any location. This is why born retailers rarely create a truly international business culture. International brands, on the other hand are very flexible with the format, multicultural, fancy and colorful, right from the start.
Planets go out of orbit
“Captain’s log, Brand Retail Enterprise. Stardate: Year seven on our journey from wholesale to retail. Staff and rental costs have risen dynamically. CFO is feeling the pinch of insufficient retail productivity, with retail making up 20% of sales yet 50% of overall costs. The latest prominent brand in that list: Apple. And that’s not the worst of it: Investments eat up cash flow and tie up working capital. ROI is dismal, KPI figures that were never relevant in wholesale are now putting finance out of balance. Venus is going out of orbit.
Space performance has decreased for years, 4-wall profits are well below 20% and payback above three years, where benchmark is rather two. Time for (uncomfortable) strategic questions: what is the goal of our retail mission, branding or profits? Full-price retail generates growth and contributes to branding, but EBIT lags behind wholesale profitability. Do we mainly seek branding, a few flagship stores only (like Nike), or do we want a retail profit center (like Apple)? Is the strategic consequence centralized, standardized and commercialized brand retail (Mars) or emotionalized, regionalized and decentralized (Venus)? Whatever, the new Head of Retail receives more responsibility – stores from Tokyo to San Francisco report to him instead to the country manager. All possible retail KPIs are introduced, new POS staff and merchandise allocation systems are installed, yet definitive clarity and a sustainable retail strategy usually remain elusive.
Not surprisingly, these moves will not create a quantum leap. The quality of the organizational model is questioned, a new Head of Retail appointed, new retail strategies developed. Yet no fundamental decision is made on whether to follow the path of Venus (branding and good appearance) or Mars (pragmatic commercialism). Nor is there awareness of a third, promising alternative: try both.
The future belongs to the planets
The future will show whether brands´ ambitious retail dreams will fly commercially. So far it seems only luxury brands have managed a successful transition. But why did they make it? Luxury companies were small when they started retail, their culture of luxury always included a sense of detail, precision, quality and responsibility. And of course their price points give financially breath when retail doesn´t work right away. It is luxury brands simply have more Martian blood in their veins, and their topline KPI allow longer financial learning curves.
In other cases, not only KPIs fall short of fulfilling retail dreams, but corporate cultures have yet to adopt a retail performance mindset. As studies on organizational development argue, cultures are generally resistant to change – especially in successfully growing environments, Venus wholesale culture remains a dominant force. After all, isn’t life on Venus easier, nicer, more multifaceted and full of opportunities for Intrapreneurship?
As much as wholesale cultures continue to prevail in midmarket brands and pose an obstacle to retail efforts, the galaxy is changing fast. A new plant is rising (“Young, bold, unorthodox, nerdy, called: Jupiter) and presents challenges for Venus and Mars. Mastering the omnichannel future will mean opening up to even more cultures. The future in brand distribution is written in the stars, but wholesalers would be well advised to learn from its Mars-Venus culture clash and prepare for a multicultural, performance-centered future.