What We Can Learn About The Future Of Retail From Bed, Bath And Beyond, Walmart and Amazon
As we reported earlier this month, Bed, Bath and Beyond posted impressive earnings with 250% increase in operating profit highlighting the successful transformation under new CEO Mark Tritton, now one year in. Digging into the success is a repeatable playbook for retailers. His first step was in revamping the executive team, signaling a wholesale change in direction and adding new energy. It closed underperforming stores and sold real estate, its One Kings Lane brand and Holiday Christmas Tree Shops to improve its cash position. That capital was then immediately focused to a go-forward strategy as it announced a $1 billion capital allocation strategy.
Investing In Stores As The Anchor Of The Omnichannel Experience
BBB is investing in its core competitive asset: stores. From its press release last week outlining their strategy (which you should read in full), “The Company will elevate the customer experience to drive conversion, unlock omni-always services to inspire more customers to shop across channels, and transform to a digital first culture to acquire new customers. The Company also plans to invest significantly in its store fleet to make shopping easy and inspiring, as part of an overall store optimization program. The store remodel plan includes investments of approximately $250 million over the next three years across approximately 450 stores which represent approximately 60% of revenue.”
Bed, Bath and Beyond quickly responded to Covid by offering BOPIS and local delivery options across its store network in partnerships with Shipt and Instacart. Retailers spent a whopping $10 billion dollars on retail technology in the first 3 months of Covid according to a Harvey Nash / KMG study. Technology adoption has been the key to success, especially those who adopted early and had greater flexibility to respond quickly.
Focusing On Profitability As eCommerce Erodes Margins
It is focused on profitability by launching 10 new private labels with an immediate goal to triple private label sale penetration. Private labels are a popular method for capturing greater margin, as a new study from FMI shows that 83% of food retailers are boosting private brand strategies for online purchasing, and 97% of retailers are rethinking supplier strategies and private brand assortments. IRI projects $15-20 billion in additional private label sales in 2020, and increase of 0.6% of overall share.
It also is reevaluating its coupon strategy, as according to its own analysis, 40% of coupons were ineffective and just lost revenue. “Today, we have an over-reliance on the coupon,” Chief Merchandising Officer Joe Hartsig, and if you receive the unending sale email blasts, you understand. While short-term, this may affect trips driven through marketing, especially as Covid era shoppers trend towards discount/value, long-term it enables more strategic moves towards customer loyalty programs that can be targeted. “We’re seeing a pretty heavy shift in revamping loyalty programs, because the old ones aren’t working anymore.” said Scott Compton, Forrester.
Investor Relations Are Key To Ensure Access To Capital
And BBB is focused on investor relations, as access to capital is especially key these days. It announced a $675 million stock buyback program, signaling bullishness in its prospects. Its stock is up 38% this year after losing 80% of its value under the previous CEO. It also is riding strength in the Home Goods category overall this year.
How Walmart Is Merging Omnichannel Capabilities Via Stores
Walmart this week announced new capabilities for its Lab Stores, four stores with enhanced integration between the front and back of the house. In a Walmart blog post explaining the initiative, John Crecelius, senior vice president for associate product and next-generation stores said, "Their purpose is to find solutions that help our stores operate as both physical shopping destinations andonline fulfillment centers in a way that has yet to be seen across the retail industry." He highlighted four areas of new capabilities:
Omni-Assortment - some products sold in-store were not offered online until now.
Inventory Speed - a new augmented reality app that lets people identify boxes that need to be brought to the front without scanning each box barcode
First Time Pick Rate - Using new signage tools, “the percentage of times associates find the item on their first attempt has gone up by 20% in some of the categories that tend to be our hardest to pick,” according to Crecelius.
Checkout Experience - the announcement was vague here around contactless checkout and a focus on the experience.
Taking Advantage Of Category Lifts And Trip Drivers
Retailers have found success in being opportunistic to shifting shopper behaviors and category spends. The Toy Industry has seen a recent boom as parents search for just about anything to distract and entertain their stay-at-home kids. Toy sales grew 16% in the first half of the year and are projected to grow 5-10% YoY overall according to Coresight Research. With the absence of Toys R’ Us, Amazon and Walmart are investing heavily to capture the toy shopper with top holiday toy lists, investments in toy categories in-store, and increased marketing at checkout, as Target invested in an FAO Schwartz collaboration.
Amazon Posts Record Profits, Even As Costs Rise To Invest In Logistics And Covid Prevention And Stores Sales Drop 10% YoY
Amazon reported a record earnings on a 37% net sales increase, to $96.1 billion, in Q3 2020 and a whopping 197% earnings increase over the same quarter last year, impressive numbers especially since its record setting Prime Day was postponed into October.
However, the stock market reacted unfavorably to its uncertain guidance on the holiday season, a wide operating profit projection of between $1 billion and $4.5 billion.
With such an increase in sales, Amazon was able to spend a lot more money too. Employee costs went way up as Amazon hired a staggering 350,000 people in the last 4 months and spent $4 billion in Covid-related costs, taking 50,000 covid tests per day. Amazon has invested deeply in the first nine months of 2020 to the tune of $30 billion in its logistic networks. Shipping costs rose 57% or $5 billion in the third quarter and its delivery capacity is expected to increase this year by 50% which is good news when you need to rely less on the USPS.
One concern is that Amazon Web Services business, which has long generated the profits that allowed it to subsidize its money-losing eCommerce business, grew at 29%, the lowest growth rate since it began reporting it separately 5 years ago. It’s still a massive money generator for the business.
Another clear and painful weak spot is its physical stores, where Amazon continues to lag behind expectations. Physical sales dropped 10%, even though Whole Foods was open through the pandemic. "Whole Foods needs to remedy this situation: grocery stores should be compelling and engaging and good at enticing shoppers," Global Data’s Neil Saunders said. "They should not be seen merely as a way for Amazon to service its online grocery business." It’s yet to be seen whether Amazon really understands physical retail in a way to capitalize on where the majority of transactions occur. This is especially worrisome as it lost overall eCommerce share to physical retailers with strong online presence during Covid (Target, Walmart, Best Buy, etc.).
Retailers Brace For Election Night Uncertainty, Including Possible Violence And Long Term Chaos
What are the real costs to the American economy of increased divisiveness, polarized politics and violent rhetoric in US politics? Across the country, retailers are proactively boarding up storefronts yet again, hurting potential sales at a time when they are more needed than ever. With between $1 billion in insurance claims from looting and vandalism according to the Insurance Information Institute and a projection of $2 billion by EOY, 2020 will be the most expensive year ever. What’s most unusual about this year is how widespread the violence and unrest is, covering both urban and suburban areas across states throughout the nation. Just this weekend, car caravans of Trump supporters blocked the Garden State Parkway in New Jersey, bridges in New York City, and roads in Texas, including intentionally causing a traffic accident with a Biden/Harris tour bus, which is now being investigated by the FBI. Some have posited that these just practice runs for election day disruption.
Meanwhile, Trump has encouraged armed militia groups to go to the polls as “poll-watchers” to “prevent any fraud,” although it is hard to see these tactics as anything more than voter intimidation. Walmart took the risks of violence so seriously that it initially pulled guns and ammunition from its shelves, sending gun stocks down, before putting them back after significant push back from shoppers and gun lobbyists.
What may be even more damaging is not just that election day may be disrupted, violence may erupt and results reactions may lead to more violence on either side, but additionally, because of unprecedented levels of voting and an explicit strategy of prolonged legal challenges to the election in swing states, election uncertainty may last weeks, extending out the likely period of disruption. This is yet another challenge to the retail industry in a year of widespread disruptions.
Babe Wine launched an “Election Night Survival Kit” which includes of course a bottle of wine, a “Scream Here” pillow. With anxieties at all time highs, count us in.