A Moneyball Experiment in English Soccer’s Second Tier. Although people are quick to point out that Billy didn’t win a title with his Money Ball method, his team did improve within his limited resources. Barnsley will unlikely win any title, especially the Premier League. However, as long as the team makes it to the top tier and earns more money by just showing up, it should be an astounding success itself.
Khmer Temple-Hopping Motorbike Loop | Tra Vinh. Vietnam has a lot to offer in terms of tourism. I’d say that instead of frustrating yourself in touristy places, you should head to destinations like Tra Vinh, which have their own charm, beauty and history. Personally, I prefer Tra Vinh to cities like Nha Trang or Mui Ne.
Hyundai Nexo breaks world record for longest distance travelled in a FCEV. Even though a long distance was achieved with one tank of hydrogen fuel, eventually these cars still need to refuel. Hence, the challenge of propping up fuel stations in popular areas still remains. Unless that is accomplished, there is still a long way to go for fuel-cell-electric vehicles. Though the way got a tiny bit shorter.
Censorship, Surveillance and Profits: A Hard Bargain for Apple in China. Not only is China a $50 billion market for Apple, but it also houses its main irreplaceable yet supply chain. Even a local billionaire hero like Jack Ma disappeared over night and lost his influence after angering the government and President Xi. What chance does Apple have to be anything different? If Apple still wants to do business in China, it has no choice but to do everything it can to balance between appeasing Xi and protecting its customers as well as principles. Some may say that Apple could have pulled out of the country like Google. Well, that’s Google principle. Tim Cook’s principle is to show up because “nothing changes from being on the sideline”. You can disagree with his or Apple’s principle, but you can’t just change it. Additionally, as a Vietnamese, I don’t think it would be much better to relocate all the supply chain to my country. The story would be more of the same. Well, in many countries, it would still be more of the same.
I noticed that there were a few products that were much more expensive on Amazon than from other retailers. Take Choc Zero chocolate and hazelnut spread as an example. This is a product I really like because 1/ it’s chocolate and 2/ it’s keto. While a 12oz jar is sold for $9 on Choc Zero’s website, you’ll have to pay $20.81 for the same jar on Amazon, whether you have a Prime membership or not. Sure enough, with Prime, you don’t have to meet a minimum order requirement from the manufacturer itself, but after including the shipping fee of $5 from Choc Zero, the whole order will still be much cheaper than what is available on Amazon.
Another product that has the same issue is Fromm Tunachovy Cat Dry Food. A 5lb bag of Fromm Tunachovy Grain Free Salmon Dry Food costs around $20-$21 at normal retailers. The same product is running at $35.49 on Amazon with or without Prime.
The difference in price likely results from multiple fees and commissions that retailers have to pay for the privilege of being on Amazon. To keep the same margin, retailers have no option but to raise prices. However, increased prices make their products look less competitive and friendly to consumers. How many consumers wanted to buy the two products above on Amazon but abandoned the plan because they look too pricey? I mean, how many are not deterred by a jar of chocolate spread costing $20? I sure was. Much as I like the convenience of shopping with Amazon, I’d rather buy more in quantity than what I actually need at the moment to save me quite a bit of money.
The lesson here is that: check the prices of what you are about to buy with other retailers before hitting that “Order” button on Amazon.
Costco is a household name in America. It’s not an exaggeration that some even call it a cult. The company is a warehouse-styled chain of giant stores where young people and families shop on a weekly basis. To be able to shop at Costco, shoppers have to pay an annual fee from $60 to $120 for the privilege. How does Costco convince shoppers to shell out that money in advance when there are various other alternatives? Somehow throughout its history, Costco managed to establish a resilient and great operating model that combines scale, low prices and customer services. Shoppers know that by shopping by Costco, they can save money because of the low prices and the savings should be more than enough to justify the annual fee up front. As more people sign up and shop at their stores, Costco leverages the scale to negotiate low prices with suppliers. The low prices, while quality is maintained, drive shoppers to Costco and the virtuous cycle keeps going. It sounds easy, but it’s not. The model presents a chick-and-egg problem. To replicate Costco and convince folks to pay upfront for the privilege, a retailer would have to offer low prices, customer services and adequate quality. Those things aren’t cheap and the retailer in question would need enough shoppers to make the scale operable. In that case, it would have to take a lot of losses on its chin and there is still no guarantee that it could be another Costco.
Costco in numbers
More than 97% of Costco’s annual revenue comes from net sales while the rest is from membership fees. In 2020, the company’s revenue reached $167 billion, $3.5 billion of which came from membership fees. On a year-over-year basis, Costco’s revenue grew around 7-9% a year. On a comparable net sales change basis (excluding the impact of foreign current and fuel), it outperformed Walmart US and Sam Club US for the last 4 years. Retailers use comparables’ data without fuel to better show the changes every year in its core operations. It’s particularly helpful in removing the impact of new or closed stores when evaluating performances.
Costco is essentially a low margin business. Its net sales gross margin is less than 12% while its operating margin is a low single digit. If we look at Costco’s gross margin and its SG&A share of revenue, it’s safe to say that membership fees are responsible for most of the company’s operating margin and profit. The good news for Costco is that part of the business seems to be growing healthily. The number of members grew at more than 5% every year and the number of the more lucrative Executive members grew at an even faster rate (6%)
I think about Costco’s membership fees as a customer retention tool, not a customer acquisition tool. Nobody ever comes to Costco because they want to pay $60 or $120 upfront for the privilege. They come thanks to the brand’s appeal and the word of mouth. As they buy in with the annual fee, the switching cost becomes high and they are more incentivized to shop ore to justify the fee. Because Executive Members “generally shop more frequently and spend more than other members”, the fact that the higher tier base grew faster than the overall member base goes to show that shopper buy in this concept more and are willing to pay extra for the privilege. And it is reflected to some extent in the growth of comparables net sales, especially in comparison with Walmart US and Sams’ Club. That kind of brand, trust and relationship with customers is a powerful competitive advantage that even money can’t buy.
I came across two stories about how Costco went out of their way to improve their customer service and satisfaction
So how did we arrive at this point? It all started in 1987 with a salmon fillet and a mission to offer customers the highest possible value for the lowest price. The following anecdote is well known within Costco as the “salmon story.” It is regularly re-told and held up as an example of the company’s dedication to continually striving for improvement. It goes something like this:
When Costco first established its meat department in 1987, a team was dedicated to creating a quality salmon fillet. The first product was a high-quality, skin-on fillet for $5.99 per pound — an excellent value — but the salmon team saw room for improvement. In stage two, excess parts of the fish were removed and even though the quality was improved, the price was reduced to $5.29 a pound.
Later, the buying team found another way to enhance the product by offering a fully trimmed, skinless, and boneless fillet — and lowered the price to $4.99 a pound. In stage four, the team found that buying in bulk from Chile and Canada enabled them to lower the price even further, to $4.79. In stage five, the quality was further improved through certain trimming, but Costco maintained the same price.
At each point in this story, Costco could have raised the price for the improved product, but chose not to. This continues today as Costco goes to great lengths to improve its product offering while providing greater value for its members.
When Costco president W. Craig Jelinek once complained to Costco co-founder and former CEO Jim Sinegal that their monolithic warehouse business was losing money on their famously cheap $1.50 hot dog and soda package, Sinegal listened, nodded, and then did his best to make his take on the situation perfectly clear.
“If you raise [the price of] the effing hot dog, I will kill you,” Sinegal said. “Figure it out.”
Taking his words to heart, Jelinek—who became Sinegal’s successor in 2012—has never raised the price on Costco’s hot dog. Incredibly, it has sold for the same $1.50 since the retail club first introduced the dogs to customers in 1984. The quarter-pound, all-beef tube and 20-ounce soda combo appears to be inflation-proof and immune to the whims of food distributors.
When you have thousands of employees on your payroll and $166 billion in revenue a year, having the culture and the discipline to stick to your operating model is nothing short of incredible. It is among one of the toughest capabilities for any competitor to replicate and overcome. Rivals can read as much as they want about how Costco operates, but if they can’t maintain the culture and discipline year after year, they won’t be able to copy the Costco model.
I don’t think Costco is 100% risk-free. Companies come and go. There is no telling what will happen in the future, but if it can preserve its culture like it does now, the company has a bright outlook in the near future.
Disclaimer: I own Costco, Amazon and Walmart stocks in my portfolio.
P/S: if you are a fan of Kirkland, Costco’s signature private label, here is a quick look at its importance to the company.
A couple of posts summarizing WWDC event and what’s new from Apple by MacStories and WSJ
Craig Federighi on new privacy updates
But in the fullness of time, in the scope of hundreds of years from now, I think the place where I hope people can look back and talk about the places where Apple made a huge contribution to humanity is in helping people see the way of taking advantage of this great technology without the false tradeoff of giving up their privacy to do it.
“They are fierce and they are good.” – The then-President and CEO of Walmart US, Greg Foran, said this about Aldi, a hard discounter hailing from Germany.
A little bit of history. The original Aldi was founded in 1946 by Karl and Theo Albrecht in Essen, Germany. The name Aldi combines the first two characters of their last name (“Al”) and the first two characters of the word Discount (“Di”). The company was split about 2 decades later into Aldi Nord and Aldi Sud when the founding brothers disagreed over the sale of cigarettes in their stores. Aldi Sud made inroads into the US grocery market first in 1976, keeping the brand name. Aldi Nord followed through the acquisition of Trader Joe’s. Although Aldi isn’t a household name like Costco, Walmart or Target in the US, the chain has been in the US, actually, for quite some time with the first store opened in Iowa in 1976.
How has Aldi been doing in the US?
By the latest estimate, Aldi has about 2,000 stores in the US. In 2017, the chain announced a $5.3 billion expansion plan that is focused on remodeling existing stores and opening new ones. Aldi expects to have 2,500 stores in the US by 2022, making it the 3rd largest grocery chain only behind Kroger and Walmart.
Aldi was reported to have a tad over 2% of market share in the US grocery segment in 2018. Morgan Stanley estimated that in 2019, Aldi’s YoY growth surpassed that of Kroger, Target, Whole Foods, Publix and only trailed behind that of Walmart. Supermarket News said that the German-native discounter recorded about $18.4 billion in revenue in 2018, up from $16.8 a year prior. Since the company is privately held and does not have to report its financial data, these figures cannot be confirmed for 100% accuracy. In an interview in 2018, the CEO of Aldi revealed that the company’s US sales doubled in the previous 5 years leading to 2018 and added that “our same-store sales over the past several years has been much more than the industry has realized.”
In the same interview, the CEO, Jason Hart, said that in 2017, 40 million households shopped at their stores every month with 7 new million households added to the customer base. Aldi expects the figure to grow to 100 million customers every month by the end of 2022.
Apparently, shoppers love Aldi. According to the study by Bain & Company in 2018, a known consulting firm, Aldi leads all discounters in Net Promoter Score, which is a metric for customer advocacy, and is a top 3 in the grocery segment overall. A high Net Promoter Score is important as promoters are much more loyal and spend more. Per Bain, “promoters in general spend much more—$111 vs. $39 on average per month—and give retailers a higher “share of wallet”—28% for promoters vs. 11% for detractors”. A study by Morgan Stanley revealed that in 2018, 19% of shoppers who switched retailers began shopping at Aldi, second only to Walmart. Walmart got 30% of switchers, but the figure was flat from a year prior while Aldi’s number increased.
Given what we have seen so far, Aldi has done quite well for themselves in the cut-throat grocery market. What is their secret sauce?
What makes Aldi competitive?
Aldi is known for its thrifty culture and approach. The company works aggressively in cutting costs and passing on savings to shoppers as much as possible. On average, an Aldi store’s size is about 12,000 square feet, compared to Walmart’s 178,000 and Costco’s 145,000 square feet. The smaller size helps drive down either leasing expense (if the land is leased) or depreciation (if the land is owned), as well as energy costs. Regarding SKUs, an Aldi store, on average, carries 1,400 items compared to 40,000 items by a traditional supermarket. The much smaller store size and more limited item selection lead to fewer staff required. An Aldi store usually has only 3-5 employees, a significantly smaller number compared to how many employees are present at a store like Walmart or Costco. The limited item selection enables Aldi to focus on its offerings and negotiate favorable deals with suppliers to keep costs and prices low. Another benefit is that a limited assortment doesn’t require complex marketing promotions, meaning that there will be no cost on marketing materials and labor.
The way Aldi operates its stores also contributes to cost savings and lower prices. Walking into an Aldi store, you won’t notice many decorations. It looks like an ordinary, no-fancy store and it’s by design to keep costs low. At Aldi stores, there is no free bag. Customers are encouraged to bring their own bags. Carts can only be used with a quarter coin. Customers retrieve the quarter upon returning a cart. This policy has long been part of Aldi’s signature operations. Additionally, customers have to bag their own groceries. A cashier will scan items and put them in a cart, but shoppers will have to take it from there. It speeds up the checkout process, increases efficiency and reduces the need for additional staff. As far as I know, there is no self-checkout.
The book Retail Disruptors mentioned the thrifty approach codified into what is known as Aldi’s “Doing Without Checklist”. The checklist consists of rules such as “no external market research, no customer surveys, no budget forecasts, no public appearances, no publicity, no PR departments, no sumptuous business offices, no company cars, no gifts accepted or invitations for dinners from vendors.” If you are not familiar with Aldi, perhaps this may be the reason why.
For example, each product has a bar code on each side of its package so cashiers can scan items quickly. The company recently took two years to develop a new milk bottle and transporting system that swapped out metal for polystyrene crates, allowing it to get more milk on a single truck because it weighs less, which saves on transport costs.
About 90% of Aldi’s items are private labels. This private label centric approach allows Aldi total control over its selection and reduces the cost as well as complexity that comes with national brands. Private labels used to be unpopular among shoppers due to their cheap image. However, consumer preferences have changed. Astute shoppers, especially millennials, now have a much more favorable view on private labels because they are cheap and provide best value for money. According to Bain, 85% of American shoppers are open to buying private labels.
All together, Aldi’s culture and operational philosophy lead to lower prices and value for money for shoppers, especially in fresh groceries and staples. I switched to Aldi from Walmart a few months ago. My shopping habit is pretty consistent as I only need a few vegetables, some nuts milk and fruits, all of which can be found for a cheap price at Aldi. For instance, I have bought a lot of fresh grapes for 79 cents per pound for the past 4 weeks, a price much lower that what other grocers can offer. A bottle of soy or almond milk costs only around $2.4 at Aldi.
Of course, Aldi isn’t for everyone. There are a lot of things unavailable at Aldi and so are other convenient add-ons. If you want to buy a TV or an appliance or want a self-checkout, chances are that you won’t find either at Aldi. However, if you only want to buy fresh produces and staple food consistently at cheap prices without having to deal with complexity that comes with various choices, then Aldi is for you. Also, not many people enjoy spending a lot of time at a store. Personally, I can go in and out of an Aldi in about 5 minutes, if in-store traffic is light. I know what I want to buy and the store’s 5-aisle layout makes it super easy to navigate. In fact, Aldi seems to resonate well with high earners. Aldi’s new stores are in zip codes that have more than $65,800 household income on average, about $4,500 above the national average.
Grocers in the US certainly noticed the German brand’s presence. Since 2017, Walmart has closed the price gap to Aldi. Retailers also invested heavily in eCommerce and delivery options such as pickup or to-door delivery. Aldi responded by:
Increasing its fresh food offerings by 40% in 2018 and adding new vegan and vegetarian options
Introducing a partnership with Instacart for pickup and delivery
The company has performed well so far in the US. It’s expanding and has its own legion of fans, including myself. However, that’s not a guarantee for future success. The grocery market is notoriously low-margin and littered with aggressive competitors who have vast resources at their disposal. Also, changing customer preferences can go against Aldi. Case in point: Covid-19 has driven consumers to shop online more, even for groceries. If Aldi is forced to steer away from its bare-bone approach, it will eat away the discounter margin, but Aldi may not have a choice. There are several ways that Aldi can unlock growth that I can think of:
Expanding geographically to new market, especially into West Coast
Adding more convenient services
Expanding its item selection. Since it doesn’t carry too many items, there is a lot of opportunity here
Going after more affluent customers who value what Aldi has to offer
I am excited to see what the future holds for Aldi. I don’t know how it will go for the discounter. Given my personal experience as a shopper and the company’s performance after being in the US since 1976, I think it earns a bit of our confidence.
Retail apocalypse has been the rage for a few years. The competition from Amazon is said to be the main reason why many retailers closed shops permanently. The truth is that Amazon serves just another change in the competition to which failure to react will doom any business. Retailers are no exception. As Amazon is the master in eCommerce, retailers likely will not match the Seattle-based company on the digital front. What retailers can do is to find their competitive advantages and exploit them while being at least competitive digitally. I think Target can serve as a good example of a retailer that successfully transformed itself to stay competitive.
Remodeling stores and building digital & shipping capabilities
In 2017, Target announced an ambitious plan to invest $7 billion in remodeling existing stores, opening new ones, launching private labels and building out digital infrastructure. In March 2020, Target revealed that the company completed 700 remodels over the past 3 years and aimed at finishing 1,000 in 2020. Since the announcement of the turnaround strategy, Target has launched 20 private labels. With regard to shoring up its shipping and digital capabilities, Target made a strategic decision to take the task of building out its website internally, instead of farming it out to Amazon like they did before 2013. Crucially, Target’s CIO McNamara reduced the IT headcount from 10,000 to 4,000 engineers. Not only did Target strengthen its core capability organically, but they also brought in external expertise by acquiring two same-day delivery startups in Shipt and Grand Junction. Due to the new acquired capabilities, Target introduced pickup, Drive-Up and Shipt services to most of its stores. Now, customers can order online and receive the goods via:
Delivery at home in one-two days
Pickup at a local Target store
Drive up to a Target store to pick up the goods
Have the goods delivered within the same day
Results of those initiatives?
2019 total revenue, gross margin rate and operating income margin rate increased compared to 2018. Walmart’s YoY increase in the latest year’s revenue is 1.9%, lower than what Target posted. Considering the cut-throat competition that Target is in, that increase in the top line and margin should be a positive sign.
For the improved financial performance, Target credited its increased efficiency and customer engagement through both its stores and digital channels. he company revealed that 80% of online orders were fulfilled by its stores. Additionally, “during 2019, over 70% of our comparable digital sales growth was driven by same-day fulfillment options: Order Pickup, Drive Up, and delivery via our wholly-owned subsidiary, Shipt”. In its latest business update amid Covid-19, Target said that digital sales grew more than 100% YoY. The growing importance of digital channels to Target’s business can be seen in the below graph which shows digital sales made up an increasing share of Target’s overall sales in the last 5 years.
In February 2019, Fast Company reported that six of Target’s private labels generated more than $1 billion each in revenue a year. In 2019, 1/3 of Target’s revenue came from its own private labels.
Other initiatives & opportunities
In September 2019, Target launched a loyalty program called Target Circle. The program was introduced after racketing 2 million subscribers in 18-month trial. In March 2020, the number of Target Circle subscribers hit 50 million, from 35 million reported in November 2019. According to Target in Q3 investor call, Circle members spend 2-5% more than non-members. The program has no membership fee, but comes with only a modest of 1% back on purchases. Hence, it’s quite encouraging to see the membership base.
Target has branded debit cards and credit cards issued by TD. According to the quarterly filings, the cards were responsible for around 10% of the purchase volume at Target
Target-branded cards not only allow the retailer to gather so much data on consumers, but also provides a healthy boost of revenue. For the past 3 years, Target has received $680 million of credit card profit sharing from TD. I am not familiar with the agreement between Target and TD, but I think that if more folks sign up for the branded credit cards and spend more using the cards, Target will get more revenue from its issuing partner.
In my opinion, the turnaround strategy by Target has been a fair success so far. However, Amazon and Walmart haven’t stood still either. They also push and innovate every day. If Target wants to avoid the fate the likes of Sears did, they will have to continuously push and innovate as well. But they can serve as a case study against any generalizing claim that anyone not named Amazon is facing retail apocalypse.
Here’s How TurboTax Just Tricked You Into Paying to File Your Taxes. I used Turbo Tax this year to file my taxes and ended up paying $100 or so for the service. Though the service is advertised as free, there are numerous hidden fees that will end up on the final page of your application if you are not careful. Plus, several weeks ago, companies like Turbo Tax successfully lobbied Congress to stop IRS from building an online portal, which is a terrible decision.
For the past two months, I lost interest in picking up a book for some reason. Nonetheless, the streak ended today as I finished this book.
The book offers a detailed and insightful view on hard discounters which usually act as disruptors in a local retail market. The book defines hard discounters as follows:
Hard-discount retailers offer basic goods and daily necessities at the lowest possible prices, while maintaining high-quality standards. A hard-discounter store differs from discount supermarkets or hypermarkets like Asda, Kaufland, or Walmart. Hard-discount stores are typically about 8,000-15,000 square feet, less than one-tenth the size of a Walmart Supercenter, with probably lower staffing levels.
To reduce costs, hard discounters often display items on shipping pallets and in the boxes in which they arrive. The store is minimally decorated and offers a limited assortment of consumer packaged goods and perishables – typically less than 2,000 stock-keeping units (SKUs). In contrast, the average US supermarket carried 40,000 to 50,000 SKUs in 2017, while a Walmart Supercenter sells over 100,000 grocery and non-grocery items.
Here is what I learned from it
Beware of potential threats in the market. The book told stories of retailers around the world that paid the price for under-estimating hard discounters. They dismissed the arrival of hard discounters at first and when they realized the threat was real, it was already too late to stop the hard discounters.
Benefits of offering a limited assortment of SKUs. I am usually overwhelmed by a plethora of choices at restaurants or supermarkets. As the book says, to shoppers who are under time pressure or who intend to buy rather than browse, a better shopping experience is to be offered streamlined options or a limited range of choices. Plus, retailers who sell a limited assortment, especially private labels, can negotiate a better economic deal with suppliers due to economies of scale. A better deal will help the margin of hard discounters. Additionally, a limited assortment of goods means smaller stores – lower rent, saved costs on logistics and staff.
Go-to-market strategy. Hard discounters tend to enter a new country through a specific market first. Get the foot in, the logistics and operations in and then expand. Also, each go-to-market strategy varies from one country to another due to a host of factors such as household income per capita, economic growth, shopping preferences. Blindly adapting a blanket strategy to different markets may lead to failures.
The book offers a comprehensive view on different aspects of hard discounters and retail in general. It confirmed my belief that a competing strategy can be made up of so many factors that are intertwined together, including to not limited to:
The size of assortments
Whether a retailer carries more private labels or national labels
How man perishable items a retailer carries
Whether it has a good brand name
Whether it has economies of scale
Whether the shopping preferences of local shoppers are a good fit
How much a retailer spends on marketing, promotions and discounts; and for how long it can sustain the effort.
A retailer’s culture
After penetrating a market, whether a retailer can survive the competition depends on the retailer’s ability to carve out a niche in the market where it can be competitive, using a combination of the above factors or more.
A few notable stats
Private labels account for somewhere between 70-90% of hard discounters’ assortment
In 2017, middle-class shoppers in the UK account for 60% of shoppers at Aldi and Lidl
In Germany, hard discounters accounted for three out of every ten euros spent on grocery purchases or 60 billion euros in 2017
Aldi entered Australia in 2001, and by 2017, had cost conventional retailers like Woolworths and Coles AU $16 billion in lost annual revenues
Trader Joe’s offers around 3,500 different items, Lidl between 1,500 and 2,000 while Aldi carries between 1,200 and 1,400 products
In Germany, Lidle was the largest advertiser among grocery retailers in 2017 (almost 280 million euros) and the sixth-largest advertiser in the country ahead of McDonald’s, Daimler, Unilever and Samsung
Trader Joe’s sales per square foot is $1,633, twice that of Aldi and Lidl, four times that of a Walmart supercenter and 8 times that of Dollar General
In Australia, 26% of Aldi shoppers were from high-income families in 2006. The figure shot up to 50% in 2014
For the average US grocery retailer, a loss of 1% in sales leads to a loss of 17% in operating profit
In this post, I’ll discuss what I have found to be the trends in retail. Since I already had to do some research for work, why should I not share it here?
First of all, all businesses want to achieve one or more of the following objectives:
Boost customer satisfaction
Retailers are not an exception. Trends, plans or strategies revolve around those objectives. From my perspective, there are three primary fronts where most retail actions take place: stores, digital presence and logistics.
Stores as a destination
Retailers are increasingly turning stores into a destination, aiming to make shopping an experience as much enjoyable as possible for shoppers. Nordstrom offers pickups from online shopping, alterations and tailoring, curbside pickup and services. More details on their well-known customer service can be found here and here.
You must have heard about Amazon Go Stores. On your way into the stores, simple scan your phone on a reader and Amazon automatically knows about you through your Amazon account. Grab any item you like and simply walk out of the store without any cashiers or checkouts.
Another example is how Nike is using their app to elevate in-store experience for shoppers. With the Nike app, consumers can scan QR code on products to get more information and have the products brought to the changing rooms or to themselves. The app can be used for payment as well so that consumers no longer have to stand in line.
One final example is Apple. Apple stores, in addition to fancy display of products and glass windows, also feature coding lessons, music labs and kid hours.
There are more examples of how retailers are making in-store shopping as enjoyable as possible for consumers. If shopping becomes more frictionless and customized, consumers are happy and retailers can boost their top line.
Real estate is limited and expensive. Hence, it is important for retailers to maximize revenue per square feet. One trend that I noticed among retailers is that stores get smaller and retailers become more conscious of what they display. Below is a quick look at some retailers’ footprint. The majority’s store size decreased from 2016 to 2018, but revenue per square feet increased
Even though there has been talk of the retail apocalypse, major retailers are opening more stores
One Carson’s store in
Illinois had shrunk from 250,000 to 120,000 square feet as the management team
went through 100 TBs of data to figure out what people really want to buy.
Apparel which was not selling well was reduced by 50% while popular categories such
as furniture, large appliances, toy department, bakery, hair salon and art
gallery expanded. Instead of restocking once a season, the store receives fresh
items daily and changes over all its merchandise every two weeks
I believe that when people talk about the demise of retailers because of technology, they are referring to retailers who fail to embrace technology. Physical stores nowadays are the showcase and extension of the technology that the retailers have in place.
The integration of physical stores and technology happen through your personal phone and digital accounts with retailers. Whether it’s QR code, digital app, mobile shopping, information research or online payment, everything happens through your phone. It is interesting that it’s no longer the case that online enhances offline by driving traffic to stores. Nowadays, data generated inside stores can be used to enhance the online experience. Imagine that retailers can use data such as what you buy or what you are so close to buying, but decide not to, in order to run targeted marketing on you through your mobile app.
As mentioned above, the use of mobile apps can make in-store experience pleasant. Mobile apps can help improve significantly revenue with mobile shopping and payment. With the integration of data generated in-store, theoretically, target marketing should be more efficient.
Below is one slide from the investor presentation of Casey’s Store, regarding its digital strategy
We all want our deliveries to arrive as fast as possible. Amazon is the trailblazer in this with Prime and then Prime Now. Other retailers such as Target or Walmart follow suit with two-day delivery with fewer and fewer restrictions. The challenge to retailers is how to achieve such a feat without breaking their bank on having many fulfillment centers and all other expenses.
First, on-demand Just-In-Time warehousing. The idea is to tap into unused space in a crowded U.S. industrial real-estate market. As buying behavior changes rapidly and demand forecast is more unpredictable, retailers prefer not being locked into long-term leases or rents. For example, per WSJ:
This holiday season, Walmart Inc. used Flexe Inc., a Seattle-based marketplace that connects warehouse operators with businesses in need of storage, to secure about 1.5 million square feet of temporary space to handle the mounting demands of e-commerce fulfillment. Hence, improving the logistics efficiency is of importance to retailers.
Another trend is micro-fulfillment. It’s about leveraging robotics to operate warehouses in confined urban spaces, speed e-commerce fulfillment, and reduce last-mile delivery costs. Micro-fulfillment focuses on leveraging software, AI, and robotics to operate small urban warehouses and fulfill online orders.
In short, technology is rapidly changing retail on different fronts. It is an exciting space and I am both curious and excited about it. I do believe that physical stores, as long as they are run properly and integrate technology, are here to stay.
I have been doing some industry research for work, specifically on the retail industry. One trend that CBInsights mentioned in their report was that retail stores were shrinking in size. CBInsights argued that retailers wanted to more conscious of how they made use of their retail space. The competition is so fierce that retailers cannot afford to do everything, be everything and sell everything. They tend to get more nimble in operations and conscious of what they have on display. Nonetheless, CBInsights’ latest year in their data was 2015. So I went through the financial reports by several retailers to find out if retail stores are actually shrinking in size. Before I go through the findings, below are a few important notes:
The list of retailers was from this article by WSJ. There are several retailers whose information was not retrieved. The omission was attributed to the way such retailers structured their data, making it time-consuming to retrieve data and complicated to explain. Hence, I decided to omit those retailers
Retail is a complex industry. The data is for reference only and may represent to some extent the players or trend in the industry. By no means do I believe that the data represents 100% the retail industry
Data from 2015 to 2017 was from the chosen retailers’ annual reports. Data in 2018 was from the latest quarterly reports. Only Walmart already filed their 2018 annual report
Apart from Walmart and Sam’s Club, no other companies had their revenue data retrieved. It doesn’t make sense to analyze revenue per square feet with only 3 quarters’ data recorded
Data is for the retailers’ US segment only
Revenue by Sam’s Club excludes fuel revenue
Number of stores
Among the surveyed companies, only Best Buy, JC Penny and Sam’s Club lowered their store count
Average Store Size
Best Buy, JC Penny and Sam’s Club increased their average store size. The rest decreased theirs, except Dick’s, which keeps their store size more or less the same for the past 4 years
Revenue per square feet
Only Target saw their revenue per square feet decrease in 2017, compared to 2016 and 2015. As the chart can show, 2018 looks to be a good year for Walmart. Both Walmart (the brand) and Sam’s Club increased revenue per square feet, especially the latter.
The majority of the surveyed companies reduced their total retail space, but managed to make the most of their selling space. This is in line with what CBInsights mentioned (I touched on it above as well).
The data I collected is available here on my Tableau profile