Carlos Castellanos

22 October 2020

3 min read

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How mass brands can avoid obsolescence

By Caroline Rehfuss

6 min read

The retail landscape is in the early stages of long-term, structural disruption. While only ~15% of retail sales in 2019, e-commerce penetration is increasing as the pandemic is accelerating the shift from “bricks” to “clicks.”

Taken together with an uptick in store closures over the past three years, brands leveraging physical retail to drive awareness and emotional connection with consumers need to navigate a world in which their distribution and ability to elicit loyalty are at risk. To avoid commoditization and become more consumer-centric, brands are going direct-to-consumer with their product offerings.

Retail disruption is here to stay

Store vacancies are at a post-financial crisis high and many malls are expected to close over the next five years, which will cause entire shopping ecosystems to disappear. As stores close, brands will have fewer physical outlets to connect with consumers and may not be able to maintain a current level of profitability, resulting in an existential crisis.

When these store closures will reach equilibrium is unclear, as the United States is “over-stored” relative to other retail markets. With ~24 ft. of retail space per capita, its retail footprint is 5x greater than the U.K and Japan, 8x greater than China, and 10x greater than Germany and South Korea.

As a result, ongoing store closures are expected to continue and brands will need to adjust their go-to-market strategies in order to survive a world with fewer stores.

The current environment is dilutive to brand equity

One of the primary challenges to brands in the wake of large-scale store closures is discounting being applied to drive traffic. National brands typically account for more than 60 percent of department store sales and over the last several years, they have been discounted heavily in order to attract more consumers and offset declining mall traffic.

Similarly, when stores go out of business, inventory is liquidated onsite, online, or sent to off-price retailers like TJ Maxx, Marshalls, and Burlington, where it is sold at 20 percent to 60 percent below regular prices.

This creates a complicated scenario wherein customers expect promotions all the time as demand becomes more elastic. Under these conditions, many brands have lost pricing power as their emotional connections with consumers are no longer enough to offset promotional pressures from a deteriorating retail landscape.

The bifurcation of brands

Physical retail provides a tangible location for brands to build emotional connections. A world with fewer stores limits the opportunity for brands to interact with consumers and communicate their messages through mechanisms such as personalized service, curation, discovery, and community.

Over time, brands that have consistently delivered emotional connections have been able to command premium pricing and higher margins, particularly in certain categories such as fashion and electronics. However, the current environment is putting these connections at risk and creating a bifurcation of brands between those that are able to maintain brand equity with consumers, and those that fail to do so.

If brands are unable to differentiate themselves from low-price and private-label products in the absence of a physical presence, they could find themselves in a downward spiral of decreasing volumes and deteriorating margins amid price wars.

With this in mind, brands are bifurcating between value and premium products. On one end of the spectrum, some brands are becoming commoditized as they seek to compete on price to maximize units sold. On the other, brands that drive loyalty by re-orienting their product, service and brand entirely around consumers will be able to thrive in a world with changing consumer expectations.

Blog Retail disruption2
The emergence of DTC

Direct-to-consumer (DTC) channels like company-owned stores and e-commerce sites and apps will be key for many brands’ ability to maintain their sales and profitability despite the troubled retail environment.

Through DTC channels, companies can create touchpoints with consumers that allow them to navigate the current retail landscape and maintain brand equity. Specifically, they allow brands to drive engagement and emotional connections through distribution channels they control.

These direct-to-consumer touchpoints help brands create authentic relationships with consumers, that they can then leverage to elicit loyalty and increase customer lifetime value.

These benefits of DTC matter more than ever because the retail dislocation we have seen is the new reality, and one that Covid-19 has accelerated. For instance, retail store sales in the second quarter (April-June) were -62% for clothing stores, -47% for electronics stores.

The brands that depended on these physical distribution channels are most likely to be facing financial pressures, whereas those with strong enough emotional connections and a strong digital DTC presence like Nike, lululemon, and Aerie will be best positioned to thrive

Carloscastellanos
Carlos Castellanos
Innovation Manager

Carlos advances the thought leadership of the Chief Innovation Officer of Samsung Electronics by drawing insights from industries, consumers, technologies, and emerging markets. Prior to Next, Carlos was an Associate Director at UBS Investment Bank where he covered US Retail and initiated research coverage of Mid-Cap Banks. He was also an investor at Crystal Rock Capital Management (Consumer & Media) and Principal Global Investors.