Episode 15: Keith Jelinek - Future of Retail

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Managing Director Keith Jelinek joins to discuss the state of the retail industry. Topics include omni-channel retailing, success in the pet store sector, implementing sustainable strategies, trends being adopted in today's market, and what the future looks like for the industry as a whole. 


TRANSCRIPT

 

S1 01:08

Keith, thanks for joining us today in the ThinkSet podcast. I'm looking forward to chatting about your recent articles in the ThinkSet magazine. How are you doing today?

S2 01:16

I'm doing well, Eddie. Thank you very much for having me.

S1 01:20

So you just recently authored an article in the ThinkSet magazine talking about retail and the industry as a whole. So let's cut to the chase. Is retail dead?

S2 01:31

Retail is not dead by any means. What we have been seeing out in the environment right now is what I would call a reset. As many shopping patterns and consumer behaviors continue to change, and they have changed for the last couple of decades, and a lot of this is just driven by digital transformation. There's many forces of change at work. A few of them have to do with, as you probably know, consumers today can browse a product, they can look at pricing just using their handheld device. We've seen that as a major change. We also have seen many different companies are starting to bypass retail stores and they're offering their products directly to the consumer. And then we have this big force out there called Amazon, that offers not only one day shipping to so many people across the country today, but they even will deliver same-day delivery in many of the high density markets like Chicago and New York.

S2 02:35

But the thing to remember is retail sales in the US have continued to average about 2% growth over the past three years. And as according to data that's been released by the US Census Bureau, online and mail order is growing even faster at low double-digit rates. We're seeing a 10% to 11% growth rate, year-over-year for online, and it's continuing to move upwards. But what we're seeing is that retail is not dead, and retailers just need to spend an enormous amount of time and they spend enormous amount of capital expenditures on opening and maintaining physical stores. And this shift to digital transformation is forcing more agility that's needed with retailers. In fact we looked at the competitive impact of the Internet and we asked executives to rank where they saw this. And they saw this as one of the most disruptive retail trends. So although we've seen over 7,000 retail locations, just in 2017, close their doors, it appears that we're on pace this year to exceed that number. And this is what we're seeing is just a realization of the shift of consumer shopping behaviors.

S2 03:59

But I just want to add, let's not forget that all consumers love to shop. It's still one of America's favorite pastimes. And we have to continue to focus that 90% of all retail sales are still occurring in a physical store. So retail is not dead, it's just coming out of a trip to the emergency room, and emerging to quickly adapt to all these changes.

S1 04:23

That's a nice way of putting it. So given the changing nature of the American consumer, and as you say, the majority of their shopping is still being done in a brick-and-mortar store, what are some of the ways brick-and-mortar retailers are adapting to this overall environment? Is there anything that's working particularly well, combining the brick-and-mortar with mobile for example? Or is there something that's just a no-brainer that everybody should be doing right now, as they're coming out of the ER and recuperating?

S2 04:51

Now, that's a great question, Eddie. And what we're seeing is we're seeing many retailers out in the landscape that are adapting to this digital transformation rather well. And what they're doing is they're moving to more of a test and learn environment. They know that they have to have a shorter product development time. There's many challenges to quickly identifying what the new trends are for customers and consumer behavior, and then be able to quickly and efficiently adapt just as soon as they can as possible. And that means doing things faster and much more efficiently. In fact, there's five things that we would see that are working really particularly well for retailers. The first one is they're doing a good job at integrating online and the stores. And they're starting to give more of what we would call and omnichannel view. So when you think about it, the younger consumers, they're demanding a shopper experience that is totally different than what the baby boomer generation had. They're thinking that they need to have a mesh between mobile applications with the store experience. And retailers need to start thinking about reaching their consumers whenever and wherever they want to make a buying decision. And the successful ones are doing that rather well.

S2 06:12

The second thing that we're seeing is really retailers stepping back and making sure that they fully understand the customer journey. And what this means is the ability to personalize the consumer experience. What retailers need to understand is how do their consumers interact with their own brand? And how do they interact with your competition? They need to be able to measure the engagement, and they need to be thinking and targeting social media and thinking about how they're going to start to spread their marketing dollars between digital, catalog, and what we would see in most of our weekly newspapers, which is traditional print. The third thing that we're seeing successful retailers do is they're starting to capture all of the consumer data that's available, and analyzing it to start to produce a major impact around products and services that are all along the product life cycle. So what I mean by that are things like looking for data and analyzing data around not only what consumers have purchased and where, but what are they returning and why are they returning it? And then, separate the winners from the losers with the products, and look at the differentiation between sizes and colors, garment weight, sleeve lengths. All these things can help retailers to tailor the right product assortment that they're going to have on hand. Not only at each physical store, but each distribution facility and each facility where they ship their e-com or digital orders.

S2 07:49

The other part to mention with this, Eddie, is that loyalty programs are providing a treasure trove of data. And if retailers don't have a loyalty program today, they need to consider creating one. The fourth thing that we're seeing along this line, and it's a new dimension that comes into play, is rationalizing the physical store portfolio. So what we mean by that is, retailers are faced with making decisions regarding store performance as each one of their leases come due. And traditional four-wall metrics to measure that are somewhat obsolete. The winning retailers have started to adopt more of what we would call an omnichannel view. They start to measure not only what's been purchased in the physical store but to also include what's been picked up in the store, what's been returned, and more importantly, what consumers within their shopping radius, which might be two, three, four, five, seven miles, what they're purchasing online. So this omnichannel view starts to provide a totally different lens to look at the true market profitability, and then start to improve decision making for leases, and pruning the fleet with more of a three- to four-year view versus a view monthly as each one of the leases come up due.

S2 09:13

And the fifth area, which tends to be really the most difficult and a drain on capital expenditures, is the careful investment that retailers need to make into new technology. Technology to help analyze all types of consumer behavior, identify shifts in product trends as we mentioned, and engage with the customer on more of a digital platform and be able to read and react to that engagement, improve distribution and speed. That's all really important as well as just investing in the customer experience within the physical store to improve the shopping environment.

S1 09:51

Keith, you've mentioned Amazon a couple of times already. But what does it tell you that Amazon has gotten into brick-and-mortar over the past couple of years?

S2 10:00

This is a very significant strategic leap for Amazon. It's something that, for the first 10 years of their existence, nobody thought that they would do, and then they started to make the move. And what we're seeing is Amazon is really starting to focus on an opportunity to interact with the customer more at the point of a physical purchase as opposed to what we would call the point of their front porch when they would pick up a parcel. With the astounding customer experience and supply chain efficiency that Amazon has, it makes a lot of sense for them, and it's sending a big wake-up call to retail. We know that one of the most expensive costs in the delivery cycle for product purchased online is what we call the last mile. So that's the last mile that any kind of a delivery vehicle takes before it's delivered to some type of a home or an office address.

S2 10:56

With Whole Foods, enticing the customer to come in, pick up their order in the physical store is not only less expensive, but it actually allows Amazon to use the store location as more of a distribution point. And the data also allows them to take a customer when they come in to the store. And they know this from data that they've been able to mine, that when that customer comes in to the store to pick up their order instead of buying it and having it delivered to their home, that there's a higher tendency that they're going to buy at least one more item while they're in the store. So what we see with the Whole Foods acquisition and this push by Amazon, that they're going further into grocery and into more difficult items to distribute with life cycle times that are very short, such as perishables, prepared meals, and meal kits. And so having these distribution points closer to the end consumer and distribution points with Whole Foods of being an assortment that appeals more to millennials, it's the right move for them, and it's going to give them a significant advantage.

S2 12:09

What's interesting when you mention Amazon is one of the next disruptors that we have to be on the lookout for is for Amazon to start to get more into capitalizing on this last mile of transportation. Because if they can capitalize on that, which the last mile tends to be one of the most expensive pieces in the entire supply chain cost, then what they're going to be able to do is ensure quality control of their products to the end consumer. So we're pretty excited about this of what's happening with Amazon, and we think it's sending a big wake-up call to retailers.

S1 12:47

So I live in an area downtown in Boston where the Whole Foods is a mile from my apartment, and I get everything delivered from Amazon right there and just make it coincide with when we go grocery shopping. So all the things that Amazon wants from me, I'm delivering on [laughter]. One segment that you wrote about in ThinkSet and a recent white paper is the pet store industry and how well they're doing. Why do you think that is?

S2 13:10

To help set the stage, something to just kind of put into everybody's mind is pet ownership and what we call pet parenting, and it's really a topic that's out there, it's evolving very quickly. In fact, nearly 70% of all the households in the US today own a pet. In the white paper that we recently published that you mentioned, which we happened to call Sleepless in the Doghouse, we explore some of the changes in the channel. And one of the things that's really interesting is this pet care industry has generated over $69 billion in 2017, and that's a lot of dough. It's on pace to exceed 96 billion by the end of 2020, so the growth rate is really astounding. The market itself has this high degree of fragmentation. There's somewhere around 13,000 independent pet stores, mostly what we would call single-shingle owners, people who may own one, two, or three different stores in a market that capitalize across the US. And this segment right now is experiencing a significantly high rate of mergers and acquisitions, with something announced almost every week in this type of a roll-up.

S2 14:26

The other thing that's interesting out here in this pet area is veterinary centers are experiencing, really, the same kind of fragmentation. There's over 50,000 providers of pet veterinary services that are available today for retailers and consumers, and the fastest growing channel is all around digital and online. So consumers, just like we talked about earlier, are rapidly adopting the purchase of pet food, pet supplies, and their medications to be able to come to them digitally and delivered to their porch, or to pick up in another location. So another piece of this is pet services, and what we mean by that is things such as pet grooming, they're not to be ignored. They're growing at a rate of nearly 10% of the market. So you bring this back around to 70% of the US consumers own a pet. Well, pets today are embraced as a full member of the family. It's really a recession-proof business, and the reason for that is people are not willing to cut back on gourmet foods, toys, and the latest technology for their furry friends, but if they get times where there's less money in their wallet, they'll cut back on themselves before they will on their pets.

S1 15:45

Everything you just described, the different segments of the market-- I live in an area that not only do the dogs get picked up for daycare, but there's also a large converted warehouse that's just a doggy daycare, and there's probably upwards of 100 dogs there every day. Paying good money to have the dog there all day, and then if you want, it can be delivered back home. And they only service an area of two or three miles, not to mention the three other dog stores that are within a mile, but everybody, as you say, has a dog so why wouldn't they do that? Nowhere near market saturation yet.

S2 16:17

Not at all. Not at all. There's a lot of money that is being spent out there, especially with doggy daycare and some of those locations are much better than consumer's homes.

S1 16:26

Yeah, absolutely. So in describing all of this, taking a step back, it's kind of hard to believe everything that's developed with the Internet and the advent of mobile buying over the last 10 or 15 years. If I were to ask you to look forward and tell somebody something that they wouldn't believe right now that's going to be relevant in 10 to 15 years, what would your best guess or predictions be for the future?

S2 16:50

One of the things is subscription services. And these are things that you're probably really familiar with, but people don't think about it as subscription. And these are meal kits that might come delivered to your door like Blue Apron or HelloFresh. Apparel rental. Beauty and personal care items. Although all of these types of companies and these types of products have what would be called as a high acquisition cost, they're very disruptive and a threat. And once consumers embrace them, they really tend to stick. So one thing we see is more of an evolution of these subscription-based services starting to occur. The other thing that I think we're starting to see and there's been a lot of talk about it, but now it's going to start to materialize, is I don't think cash is ever going to go away in our society, but a cashless transaction at retail is going to continue to take on a more challenging role, and we're going to start to see that with many more incentives. And this is big for retailers because it helps to speed the checkout process, and handling cash is actually more expensive from a retail standpoint. Customers have embraced this very well with online because you can't send cash, and I think more and more, we're going to see cash phase out at a retail perspective when we start to purchase in the store.

S2 18:15

The third item that's really kind of interesting when we start to look into this crystal ball is RFID, radio-frequency identification. And there's a small chip now that costs tenths of a penny to actually make and actually be applied to retail products and packages. And now, with that cost of entry being low, we see RFID actually starting to take a larger role in automating retail replenishment and real-time replenishment from the fact that when somebody picks up an item in the store, checks out with it, and then walks out the door, it'll start to send a signal that'll immediately say, "Hey, you need to go get one more of this item in this color and this size out of the back room and bring it out to display." So that's another area we see making a big impact.

S2 19:07

A couple of others to share with you when we kind of look at this, we're going to start to see even more consolidation and new emerging trends and players out there that are going to be in competition and look at things around Amazon for home delivery. Amazon has started to put their foot in the water, just recently released in the news, of starting to manage the home delivery for this last mile as we talked about. And we start to see some things that are going to probably move further in trends to where there's going to be a reduction in transportation costs and eliminate congestion, and we'll start to see likely Amazon push further into this foray and start to control this last mile in home delivery. Speaking of Amazon, we're going to see Amazon start to be a much larger player in fashion and basic apparel. And what a lot of people may not be aware of is Amazon has started to develop some significant private-label apparel lines. So we see them starting to be a big player and start to move through with a lot of disruption on the apparel side of fashion and basic wear.

S2 20:18

And then speaking of disruption, there's lots of disruption that's just starting in the entire prescription drug and PBM arena. And we're seeing this with Amazon starting to play a significant role in the filling of prescription drugs. And as a matter of fact, we saw along the way of the announcement last week on their recent acquisition in this space where they're going to start to be even a more significant role and challenging to drug store retailers. And as a matter of fact, any retailer that has pharmacy. Because what we'll start to see is there'll be a lot of price pressure from the PBMs that will want to force to a much lower cost. And the cost of dispensing a drug and moving the drug through mail order with the efficiency that Amazon has versus in a physical store is going to be really tough for retailers to compete with.

S2 21:10

Couple of other points. One, we're going to see fewer retail stores. As a matter of fact, we saw about 7,000 close last year. We're on pace to exceed that this year and probably see near 8,000 or more close. But what's going to start to happen is retail stores that we know today are going to change to interweave and to more of a-- I think what I would call it is more of a social role and starting to emerge with renovated shopping malls. And the mall we understand it and they way we see it today will eventually disappear. And it'll be a make up of retail stores, more social gatherings, more medical clinics, more theaters, more entertainment. What I really like to end with, Eddie, is that retail is not going to change. It's not going to go away. It's just going to go through this continued evolution because it still is America's favorite pastime.

S1 22:07

One other thing actually, Keith, as you were talking about and you've mentioned it a few times, so I'm wondering if I could ask you one last question about the last mile of delivery. There's got to be a couple of different approaches or theories that are being put out there now of what that will look like and how to make that decrease the burden of the cost involved in it. Do you have any predictions in particular for how that's going to evolve? Does it become like Uber and Lyft where Amazon just outsources it to independent contractors? I know I've started to see a few of my packages show up in the back of somebody's random car. Where do you see that going?

S2 22:40

I think that it's going to be several different areas that are all going to come together. One, just as you've mentioned, whether it be Uber or Lyft picking up a package and delivering it, especially in more rural areas, I think we'll see more of that. Secondly, we have UPS and FedEx that are out there as two of the major couriers for the last mile, but we can't forget there's also this thing called the U.S. Postal Service. And I think what we're going to see is even though there are government regulations around the use of the Postal Service and what they can and can't do today from a constitutional standpoint, I think that we're going to see some of those things change. And I think there's going to be efficiencies driven around the U.S. Postal Service, and I think we potentially could see some things that interweave between not just packages for the last mile, Eddie, but the actual mail that's carried. And we'll see some type of a combination between what Amazon is starting to put their foot in to do, as well as UPS, FedEx, and the Postal Service start to emerge. It's really important to think that we have on our streets today and the street outside of your apartment in Boston, there's carriers that are-- a UPS truck is going by, a FedEx truck is going by, the postmaster truck is going by, and a Lyft or an Uber is going by. That's really ridiculous, and it's going to be much better if some of these things can come together and we can actually have one or two points of destination they're running down the street versus four or five.

S1 24:16

Yeah, that's actually a really good visual because you were absolutely right in that all of those things drive by not once, but multiple times a day. Well, Keith, thank you so much. This has been incredibly interesting. Not only this conversation, but reading your articles and ThinkSet, and I learned a great deal. We look forward to having you back sometime.

S2 24:32

Well, thank you, Eddie. I'd love to.

 

 

 

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