What Will Retail Be Like in Five Years and How Will You Prosper?

That was the question asked at a meeting last week at the Agenda trade show.  The meeting was attended by various invited brands and retailers and by me.

This meeting has been going for maybe four shows now and has generally been thoughtful and productive.  That’s a welcome improvement from the larger group meetings that used to be held at ASR.  They tended to be a bit acrimonious and have limited value.  Except that I got a free breakfast.

I had to leave before the meeting ended for a dinner engagement and didn’t get a chance to put in my two cents worth.  But the topic keeps churning my brain.  Typically, that means I should write about it.

Like you, I don’t completely know what’s going to happen this afternoon much less over five years.  Also like you, I have tendency to extrapolate what’s happened in the past as I know it into the future.  That usually turns out to be wrong.

That, I suppose, is my first point.  I’ve got a few ideas, but I’m pretty certain we’re all going to be blindsided by events and changes few of us see coming.   The pace of change is not letting up.  Build your balance sheet and brand; be smart about distribution.  Anyway, here, for your edification, is:

Harbaugh’s List of Things He Thinks Are Likely to Happen.  Obviously, though unfortunately, this list excludes all the important things that are going to impact your business that none of us can even imagine.

Over the next five years, there’s going to be a recession.  I don’t know when.  The Federal Reserve has not abrogated the business cycle.  Actually, we don’t want them to.  Recessions are part of the normal economic process.  They cull inefficient businesses and poor use of capital.  Low or negative real interest rates encourage both of those.  Go read Schumpeter and his ideas about “creative destruction.”

Interest rates are going to rise.  I don’t know how much or how fast.  I don’t believe anything the Fed says.  However, I’m for rising interest rates to a certain extent.  See the paragraph above for why.

Then, if we have the recession, they may fall again, as the Fed struggles to “do something” to fix it even if they shouldn’t or can’t.

Next, GDP growth will continue to be slower than we got used to during the good old days.  That’s because there’s too much debt.  History tells us that an economy can’t grow fast when debt is too high.  There’s too much government debt, and too much corporate and private debt.  Some of you may want to say to me, “Jeff, this time is going to be different.”  I really want you to be right.  I’m not so much concerned about the national debt, which is “only” $20 trillion.  That would be manageable.  The unfunded liabilities for Medicare, pensions, social security, etc. at the federal, state, and city level make that number look downright tiny.

Not to worry too much.  This country has a lot of strengths we don’t typically think about.  In addition, unemployment is down (though people deciding not to be in the labor force is a chunk of that) and wages seem to be rising some.  We’ll get through this.

Having now covered all that depressing macroeconomic stuff, let’s look at some issues that more directly impact our industry.

Sorry, but the consolidation isn’t over.  There’s still too much retail space out there.  However, I have a sense (maybe a hope?) that the worst is over for smaller specialty retailers.  I know there will be exceptions, but the ones who have made it from 2008 to now pretty much know what they’re doing and apparently have market niches- or they wouldn’t have made it.

Department stores are going to continue to close stores or, in some cases, just go away.  The internet is our department store now.  The downside of this is the inventory they throw on the market in the process of going away.  We saw that in 2016 when The Sports Authority and other retailers closed.  At least that’s temporary.

It’s interesting how things work out.  Larger brands and retailers, I’ve written, have an advantage in the online world because the larger you are, the smaller the cost of your online presence as a percentage of your revenue.  That’s true, and is consistent with the concept of large department stores, as a result of their scale, having advantages in purchasing, pricing, and operations.  But those advantages come with the inevitable cost of trying to indiscriminately sell a whole bunch of different stuff to anybody you can get to walk through the door.

At one time, being able to see a bunch of categories under one roof was a convenience.  I think department stores deluded themselves if they thought the name of their chain mattered much.  Now, the biggest department store in the world is Amazon, and no general merchandise brick and mortar chain can compete with it.

Nor can they compete with the category killers like Best Buy or Dicks for breadth of selection.  Specialty retailers have the advantage for service, local knowledge and focus, and identifying and reacting to trends.  To get their advantages, chain department stores gave up their local knowledge and ability to react to changes in local markets.

Online sales are going to continue to grow.  Took a lot of research to figure that out.  December retail numbers out this morning (January 13) show non-store retailer revenues up 13.2% compared to December 2015.

I used to believe there were some things that just wouldn’t sell online.  Shoes, I thought.  Probably because I have a strangely shaped size 14 foot.  But once I bought our new bed on line, I decided there’s pretty much no limit.  Technology will continue to make it easier.  I’ve written about 3D printing.  I’m expecting apps that take a picture of you and shows clothes on you.  And the selection of garments, of course, will be based on your actual measurements that you’ve taken and provided just once.  Or maybe you just stand there with a yard stick next to you and the program figures out all your measurements.

Why wouldn’t you buy on line?  Because you need it right now.  Because you want your hand held.  Perhaps because you value an actual human interaction.  I’d love to hear other reasons.

The layout and purpose of brick and mortar stores is going to be different.  There will be fewer.  I’m guessing generally smaller with less inventory.  But store size and configuration is going to be a function of the brand or retailer’s internet strategy.  Store sizes will vary as some serve as nodes for inventory and distribution to online customers and maybe stores in the same region.

An aging population that’s active longer and fewer births means the demographics of your customers are going to change and be a little harder to figure out.  To over simplify, what do you do when the 15 and the 50 year olds are comfortable with the same product and when you need to be selling to them both if you want to meet goals?  I discussed demographics and their impact in this recent article.  This change is ongoing and will have an impact well past five years.  It’s an opportunity if you can figure out how to do what Vans has done.  Trouble is, I’m not sure Vans knows entirely how they’ve managed to be cool to both their older and younger customers- but they sure are happy about it.

This next one is hardly new, but the quality of your systems and database will continue to become more important.  I’ve been thinking that the better your customer database, the less you’ll be spending on print advertising.  But if the demographics roll out as I’ve suggesting, maybe that’s not quite so clear.

Unless you have a truly distinctive product, distribution will be key to brand building.  My suggestion from eight or ten years ago that you focus on gross margin, expense control, and the bottom line rather than big sales growth has held up pretty well and will continue to be valid.

The decline in barriers to entry, both in terms of risk, time required, and capital needed means new brands will continue to pop up like the damned moles in my yard.  I’m kind of wondering if some customers might tire of this as these new brands largely bring no distinctiveness except for being, for a short period of time, “new.”

I’ll end by confessing that my list is wrong and incomplete.  I just don’t know how.  That’s okay because my goal, as always is just to get you to think about the issues.  My suggestion?  Make a list specific to your own business.

Guess I’ll go out and set another mole trap now.