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What’s Next for Sears?
On February 10, 2016, Sears announced the forthcoming closure of 50 of their ‘underperforming’ stores. The closures would happen ‘quickly’, the company said in a printed statement, hoping for asset sales of $300 million as it continues its years-long restructuring and search for a place in the retail market.
Sears’ revenues are down almost a billion dollars from this time last year, and their stock price has been halved over the same period. What was once the world’s largest retailer in the 1970s become a shadow of its former self, in danger of disappearing altogether if leadership doesn’t find a way to restore some of its market appeal. Understanding how the 123-year old retailer got to this stage requires a multi-pronged review, but it boils down to a failure to react to changes in its existing market, including consumer behavior, competition, and the emergence of technology. Strategy 101, many of you are thinking, correctly, yet the losses continue.
The Home Depot, Lowes and big box retailers have changed the way appliances and hardware are sold. Many former Sears customers now look to Target (in the US) and Wal-Mart for apparel and household goods. Their travel agency business has largely migrated to DIY, either on-line or with toll-free call centers. Canadian Tire, Wal-Mart and Pep Boys have hammered their auto service, while furniture sales have also gone big box. The business now resembles a picked-over carcass in many areas.
But, the lights are still on, which means there remain customers who continue to shop at Sears. What is more, you know who those customers are. When asked, ‘Who shops at Sears?’, people respond, ‘my parents’, ‘the in-laws’, or even ‘old people’. Certainly not Millennials or many Gen-X. Can we make a retail business with a demographic that is, well, aging? I think so. These are the Boomers; there are a lot of them, and to a large extent, they have money.
Sears, however, continues to pursue an all-things-to-all-people strategy, which means no one customer group is served well. Some recent articles talk about their target segment as being represented by ‘Amy’, a middle-class woman with children who drives a minivan. While that is more specific than they have been in years, Sears will have to pull Amy away from Wal-Mart, Home Depot, Kroger and Target; once she is done in those stores, perhaps we will see her at Sears.
Could Sears build an operating strategy that supports the customers that come there already? Let’s start with what we know about the Boomer customers. With age comes potential mobility issues, corrective lenses, and less inclination to fix or repair things ourselves. They are less tech savvy, and even intimidated by some technologies such as on-line shopping and bill payment. This group is also very loyal when treated fairly. There are obviously exceptions, but most people born before 1965 will exhibit at least some age related afflictions or behaviors.
For me, the foundation of an effective operating strategy is knowing your customer. The more we know our customer, the better we can tailor our operations to serve these people well. With that foundation in mind, here are perhaps a few ways to accommodate the needs of a boomer retail customer:
Customer Behaviour or Challenge
– Reduced mobility
Operating Tactics
Wider store aisles
Loaner ‘Scooters’ in store
Sitting or rest areas in-store
Pick-up service for non-drivers
Enhanced carry-out, delivery, assembly
Parking lots with larger spaces
– Vision or hearing challenge
Larger fonts on price tags, receipts, labels
Viewing screens at all POS locations
– Technology ‘Readiness’
Continue with paper bills
Offer coaching for on-line sales
Facilitate returns for on-line purchases
– Operating Format
Open earlier; close earlier (7am to 7pm?)
Shop in City A; Deliver to City B (Gifts)
By no means are these inexpensive proposals, so within the older demographic, Sears would have to concede cost-sensitive customers to retailers like Wal-Mart. The product mix could also be reduced. Many seniors no longer do their own home repairs – my father, for example, go rid of his power tools years ago. Those that need a drill will see a larger selection at Home Depot regardless. Electronics and appliances could stay, but Costco and Best Buy are strong in these markets. Store size and related investment could shrink with a simplified product mix. Perhaps introduce a line of mobility aids.
There certainly isn’t a magic bullet for Sears, and even the ideas above would require examination with focus groups and a pilot test. It may be too late, and Sears shortly follows the lengthening list of organizations who lost sight of their customer while markets changed around them. Until they pick a customer, however, and serve, the downward slope is getting steeper.
Video – Four Companies and Knowing Your Customer
I was invited to do a ‘TED’ Talk for Smith School of Business, Queen’s University in the Fall of 2015. Here, I talk about four different approaches firms take in their operations strategy as a result of knowing, or not knowing, their customers.
The Perils of Forgetting Your Customer
In 1954, behavioral academic Gregory Stone published his seminal research identifying 4 types of consumers, including Personalizing, Convenience, Ethical and Economizing. Think about some of your recent service experiences as a consumer, and try to identify which ‘type’ you are. For most of us, the answer is, it depends. For clothing or electronics, you likely choose items that identify with who you are, and personalize the experience. When looking for something simple like shampoo or toothpaste, it might be about convenience (which store is closest?) or cost (what else do I need at Wal-Mart?).
It is interesting that even 60 years later, Stone’s customer categorizations for the most part still stand. More importantly, organizations that ignore or fail to recognize who their customers really are do so at their peril. When working with students or executives on strategy or innovation, I look at two fundamental questions – Who is your customer, and what does that customer really want? Knowing who your customer is today enables service operations and drives a successful customer experience. Understanding tomorrow’s customers sets the table for effective innovation.
Let’s look at a couple of recent examples.
The first is McDonald’s, who have struggled in recent years with an expanding menu, slower service and numerous failed product launches. In 2013, McDonald’s launched ‘Mighty Wings’ at 14,000 of their locations across the U.S. Eight weeks later, they were left with 10 million pounds of undigested wings in inventory as the product had flopped (flapped?) with customers. The problem wasn’t the wing itself – customers actually loved the big, meaty wing. At a buck a piece, however, they were too expensive for a McDonald’s patron.
Some of us eat at McDonald’s, some don’t, but over the years, most of us have dined under the golden arches at one time or another. With over 7% of the U.S. market by number of restaurants, McDonald’s is still almost three times the size of its nearest competitor, Subway. Innovation blunders like Mighty Wings don’t help the cause, so let’s drill down a bit. In Stone’s language, who really are the typical McDonald’s customers? Convenience, sure. With so many locations, long hours and generally fast service, we can get in and out in a hurry when we are hungry. Some might also say Economizing, in that ‘dinner out’ runs about $10/person, less than most sit-down type establishments. Personalizing and Ethical don’t really enter the discussion when we talk about McDonald’s, and it could even be argued that some of McDonald’s recent struggles are a result of being less convenient (larger menus slow down service) and less economizing, to the point where traditional McDonald’s customers are growing weary.
What concerns me the most is that McDonald’s doesn’t seem to be learning from their mistakes. Now on their third CEO in three years, they are innovating again, and once again forgetting who their customers are and what they really want. This week, the House of Ronald launched the ‘Your Taste’ menu as a trial in one of their New York locations . In a nice bit of process innovation, the restaurant installed touch screens where patrons place their own orders, giving the customers control over the process. Customers select their bun or bread, meat, toppings and sauces. Sounds great, right? Perhaps not, with the price of this new burger at 12 bucks. So, two BIG problems with this – The first is that the customer-driven order process will likely slow down the ordering process on a menu that includes over 100 items, especially in groups or families who crowd around the screen asking each other, ‘What are you having?’. Second, and more importantly, McDonald’s won’t attract customers willing to pay $12 for a burger. There are lots of people (myself included) who will pay $12 for a hamburger or chicken sandwich, but only at a roadhouse or gourmet burger shop. A premium burger like that is a personalizing experience, and McD’s doesn’t draw those customers. For me, this means back to the drawing board.
Another example comes from Elon Musk’s garage at Tesla, and on the surface, seems very exciting. Musk recently announced the introduction of a new Tesla SUV, the Model X. http://www.teslamotors.com/en_CA/modelx This is a good looking, small SUV typical of Tesla’s styling and features, and set to launch in 2016 (you can reserve one on-line!). So what’s the problem? Think back to those shaping questions for our strategy and innovation – who is the customer, and what do they want? Who are SUV customers? They are just about any age, but are active, and generally haul a lot of ‘stuff’, from golf clubs, to baby and toddler gear (aka the luggage club), to skies, bikes and paddle boards. What do those SUV customers want? The storage space, performance and utility to get them and their gear where they are going.
Here is the rub. Tesla’s new Model X introduced a sexy set of ‘falcon-wing’ doors on the back of the vehicle. Credit first to the designers for not using the term ‘gull-wing’ doors from the 1980s – gulls are not a sexy beast. The falcon-wing doors look great, but how do I put a roof-rack on the truck? How do I put stuff on my roof rack with the doors open? Any of you who have done this appreciate that you need to open the front and rear doors to install the racks, ski boxes or other gear on the roof. You stand on the door liner and load up. You could, in theory, keep the rear doors closed and use a step ladder to install and load the roof system in the comfort of your garage, but the fancy doors pretty much mean you need to bring that step ladder with you to unload at the ski hill. Worse yet, with a roof rack installed, you have to leave the kids at home – the back doors won’t open with the ski box on top.
Most of us give full credit to Musk and his minions for their creativity and innovation. From Paypal to Tesla to his Giga-factory battery plant to Space X and others, Musk continues to push the envelope and drive products and services in new directions. In this case, however, what we might refer to as a rare miss, the team forgot about the customer. SUV customers want a roof, and the Model X’s isn’t accessible. An important tenant of innovation is that it is OK to fail – time for Tesla to learn from this failure, cancel the fancy rear doors go to a traditional design in time for launch.
Think about your innovation process. Is the team thinking about your customers? Who are those customers, and what do they want? Most importantly, what will they want next year? Then, how will you deliver? Failure to takes these questions into account lead to failed innovations like Mighty Wings and falcon-wings, and others that are likely to underperform through a misalignment to customer needs and tastes.
Losing the Picture – The Closure of Black’s Photography
On June 9 this week, Black’s Photography announced it would be closing the remaining 59 stores in it’s Canadian chain, already down significantly from the 113 stores operating when Telus bought the retailer in 2009. I was asked two key questions this week: First, What could Black’s done to save the organization, and second, why would Telus buy Black’s in this environment?
My answers were essentially, nothing, and who knows?
Black’s market had evolved in a significantly negative direction over the past decade, as a result of a behavioral shift in their customers. This is no surprise to most of us. The vast majority of pictures taken today are experiential, and the most popular camera is a phone. GoPro cameras are up over 30%. People take a picture or video, edit it on the camera itself, and upload or share it on social media. Photography has become a self-serve hobby relying on immediate gratification.
Even hobbyist and professionals (true photographers) buy their gear elsewhere, including on-line with places like Amazon, and Best Buy. Photographers have the required edit software on their computers, there printers produce quality pictures on good paper, and they can manage their hobby or business in the comfort of their homes. Specialty store Henry’s has a more dedicated following, and has even added stores recently, but they can boast a broader selection of gear and related product and services.
There really wasn’t anything special about Black’s that offered an advantage now, or that could be built into a sustainable business in the future. Anything of interest they could have evolved into already existed with a position of strength. Black’s was an aging dog. This wasn’t a case of a misplaced innovation strategy; every business has a cycle, and this one was coming to an end.
Which brings us to Question 2 – Why would Telus buy a retailer like Black’s? There may have been potential synergies in mind, perhaps co-branding of stores or increasing Telus’ ability to participate in the boom in experiential photography. Anytime you can tap into your customers’ lifestyles is generally a good thing for a firm. Apple and Google both provide photo services in some form, so something could have evolved here given a greater sense of urgency.
Even if there was a plan, it never got the attention it needed to capitalize on any complimentary capabilities and evolve into something interesting. As a result, another fixture in the retail landscape over many decades in Canada is about to disappear in the fashion of record and CD stores, and movie rental shops.
If there is a message for leadership in all of this, it is that it is incumbent on all of us to think about who are customers are; not only today’s customers, but tomorrow’s as well. Then, we need to align our operations to providing what those customers will want. If we can and do, we may endure. If we can’t or don’t, we are done. Ask yourselves this – what are we best at? It has been a number of years since Black’s could answer that question.
Lean vs Cheap: The Decline of Appliance Quality
Do you remember the Maytag Man, that 50-something gent in the blue uniform? The ads portrayed him as lonely, a result of the quality of Maytag appliances and few service calls. I fear the old mascot would not be able to keep up with the requirements of the new world of appliance quality, and his replacement a year ago with a younger, more energetic model is perhaps a subconscious indicator of the job’s new requirements.
Even the slogan changed, from ‘Built strong to last long’, to ‘What’s inside matters’.
Hmm. I reflect on these changes as I settle up the bill on the second breakdown of our 2012 Maytag refrigerator. The first, a few months ago, was to replace a faulty drain hose that led to ice building up in the bottom of the freezer – cost $234. The new hose was a redesign to prevent this from happening again in the future. The second problem led to a complete breakdown, as the control panel circuit board faulted out. This time the fridge was down over a week while we waited for parts – cost $316.
Our initial thoughts were that we must have bought a lemon, that low-percentage product that somehow made it through the quality control process and ended up in our kitchen. How else could we end up with $550 in repairs on a 2 ½ year-old product that cost $2,000? As I spoke to various service technicians, however, and did some broader research, the picture that emerges is very different.
Service technicians appear shocked that we didn’t buy the extended warranties on our appliances (by the way, we have had two service calls on our dishwasher as well; knock on wood for the stove). There is a proliferation of websites and forums, giving people a voice on poor appliance quality or helping them diagnose or fix the appliances themselves (e.g. http://www.appliancejunk.com). LG is simplifying their repair service, by offering a ‘One-Price’ flat-rate program, where consumers know ahead of time that any service call will only be, say, $110, regardless of the cost of parts. In one particularly troubling example, a technician told a story of touring a manufacturing plant for refrigerators as part of his training with that company, and seeing product being discarded at the end of the assembly line. When he asked, the company representative indicated that if a fridge fails the quality check, it isn’t worth fixing, so they recycle it.
So how did we get here? I like to say that the world is flat – globalization has happened. What that really means is that your organization is competing with other firms from around the world, and your customers have access to those same companies. That increased competition over the last 25 years has forced every industry through significant levels of change; firms who didn’t change perished. This is nothing new.
Whirlpool (parent company of Maytag) launched a Lean campaign back in the 1990s as part of their strategy to combat increased competition from European and Asian manufacturers. Their progress through that initiative is well documented, highlighting the good (waste reduction), bad (mass layoffs) and ugly (plant closures). Authors such as Kevin Meyer and others have illustrated the disconnect between true ‘Lean’ and Whirlpool’s cost-cutting mandate. For me, lean has always been about value, and not the cheapening of products or services (See Lean and the Duct Tape Conundrum). If value is about providing what the customer really wants and needs, then the difference between Whirlpool’s initiative and lean couldn’t be more stark.
This is an industry ripe for disruption. With declining quality across the board (when asked, the technicians indicated that Bosch and Miele out of Germany were better than most, and the Koreans tried hard to at least make repairs reasonable), someone is going to figure this out. I would happily pay a bit more for a product of quality from days gone by (remember those fridges that lasted 20 years? You may still have one in the basement, cottage or garage. Hang on to it!), or for effective and supportive after-sales service (think of Bose, Lexus and others). Manufacturers need to treat the design and engineering process as in other industries; provoke early failure in prototypes and virtual models and solve that issue before launching volume production. And, while offshoring is a fact of life, without support from corporate quality, supplier development and engineering, any offshore supplier will struggle, leading to some of those quality misses we witness here at home.
Most importantly, while the organization deals with poor quality, why not build in an extended warranty? An effective service response and resolution will in fact build customer loyalty and enthusiasm, despite the fact that the situation started with a break down.
Lean is about value, and your customers determine what value really is. Appliances may be about lifestyle to some degree, but they really are supposed to just operate well and stay in the background. Focus on quality, simplicity and duration, and this dialogue moves off the table.
What Bugs Me About Target
On January 15, Target announced they were pulling out of Canada, closing all 133 stores and terminating over 17,000 employees. While the news caught everyone outside the U.S.-based leadership team off guard, it should not have been a surprise. Target in Canada never really caught on, and there are a number of reasons for it.
Supply Chain Management –
Target and their suppliers seemed to struggle with the concept of a border, even one that is part of a free-trade agreement. Stock outs, especially on promotional merchandise were common and well documented. How frustrating for consumers to travel to a store specifically for a ‘sale’ product and find an empty shelf and an employee with that ‘I don’t know’ helpless shrug.
Store Concept –
Zellers closed their doors for a reason, ultimately as a result of not being able to compete with the 800-lb retail gorilla from Arkansas. Zellers could not differentiate itself sufficiently from Wal-Mart, and primarily went head-to-head on cost. Not a battle they were going to win, especially when they layer on mediocre store layouts in less than ideal locations.
Target’s entry strategy into Canada? Let’s buy some of those defunct Zellers stores, tweak the paint and get going! In the end, Target was another low-cost retailer with no meaningful differentiation trying to compete with Wal-Mart. Fast forward to 2015, and the loss and write-offs are north of $5 Billion.
I don’t begrudge new-CEO Brian Cornell for closing Target in Canada. Given the situation, and their apparent lack of understanding of their customers in Canada, it is the right move for the broader corporation, as evidenced by the applause from the investment community after the announcement.
What bugs me is that it didn’t have to be this way.
Canadian consumers were excited about Target coming to Canada, having experienced the retailer’s low-priced chic, fresh layouts and good service south of the border. In fact, Canadians had been trained what to expect and were enthusiastic about a new player on the landscape. How nice to have customers waiting for your arrival!
There are a couple of concepts I use when discussing Operations Strategy with students and executive teams that are applicable here. The first is, customer enthusiasm and loyalty in a service only exist when there isn’t something better next door. That is, switching costs in many services are essentially zero. In this case, Canadians familiar with Target in the U.S. flocked to stores when they first opened, and were immediately disappointed. This isn’t what we expected. As a result, we may shop there a few times, but very quickly, we will return to previous shopping habits.
Target execs made a number of comments about this, essentially blaming consumer behavior in Canada as a contributor to their failure, which is an inappropriate perspective. The superstore concept works in Canada, as demonstrated very successfully by Wal-Mart. Canadians weren’t fickle – they just wanted what they experienced with Target in America.
Which leads me to my second key concept – Who is your customer, and what do they want? If the executive team in Minneapolis had considered those questions, the outcome may have been very different. In this case, consumers were cost-conscious shoppers who wanted something different than Wal-Mart (and for that matter, Zellers). Despite their continued success, we all know there is a reasonable percentage of the population who shop at Wal-Mart on a regular basis, but would appreciate a retailer with a bit better service and a more upbeat environment.
Those were Target’s customers, and what they wanted was what Target had given them on previous cross-border shopping trips. The launch strategy needed to take those thoughts into consideration. I appreciate that retail competition is fierce, regardless of the market, and Canadian Tire, Loblaw and others are going to push back on any emerging threat. Target, however, needed to strike a balance between gaining some level of critical mass, and launching well in each location. The Zellers strategy was absurd.
Answering the What do they want? question and implementing the Canadian strategy isn’t easy, but here are a few thoughts while I am Monday-morning quarterbacking:
• Location, location…you get it – Start with fewer stores, but perhaps a regional or large center strategy, and expand in a controlled manner. The stores themselves need to appeal to all 5 senses.
• Establish the Supply Chain – Military strategists know their troops are nothing without food, supplies, weapons and shelter. While most Canadians recognize that prices in Canada will always be marginally higher for many products than in the U.S., the delta here was too large. Work with suppliers to establish distribution, warehouses and inventory to effectively manage Target-esque goods at the right price. And no empty shelves.
• Hire early, and train, train, train – Employees in this environment can be a key differentiator with Wal-Mart. Hire for personality, attitude and problem-solving, and let them get at it.
• You can buy that on-line – No on-line retail operations in Canada? We have the Internet here too. Critical, especially in the controlled launch strategy above for Target’s physical operations.
As consumers, we will get over this. The 17,000 employees, while treated reasonably well with 4 months severance, are left in the lurch, and many of these people left other jobs to work for Target. Creditors, landlords, Canadian suppliers and others are also waiting in line as the corporation proceeds through CCAA. Many of these partners will get pennies on the dollar for their investment in Target’s Canadian fiasco.
Target’s Canadian strategy lacked a customer perspective, some simple considerations that seemed to elude leadership. Everything about this situation has evolved so quickly over the past three years, where all that remains will be a case study in what not to do, and multiple stakeholders footing the bill for a half-hearted northern strategy.
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