People who have been locked inside for months will likely fuel a boom caused by pent up demand, as they move from their couches back into the world. And it’s equally feasible that they won’t want to do it in sweatpants.
Shopping will likely shift away from home goods at Bed Bath & Beyond BBBY and do-it-yourself projects at Home Depot HD to beauty, perfume, clothing, footwear and travel. In-store shopping will likely see an uptick as consumers head back in-store in search of in-person experiences once again.
Barron’s recently noted a significant upturn in retail stocks as investors considered a “post-Covid world”. According to the piece, last Monday individual retailer stocks were jumping by double digits. Department stores Kohl’s, Macy’s and Nordstrom were up 17% or more, and American Eagle Outfitters and Gap were also seeing big gains. Ulta and Estee Lauder were rallying in kind, with all three major off-price retailers— Burlington Stores, Ross Stores, and TJX Cos. – up in the mid- to high teens.
But this got me thinking — if the pandemic has taught us anything, it’s that the metrics we used pre-pandemic to value retail companies need to shift.
Does the comparable store sales metric make sense? This metric has been considered by many in the industry as outdated for years.
Should we continue to consider profitability as a viable metric? We all know that Amazon AMZN is never profitable on purpose to avoid taxes, so it’s not an apples to apples comparison for most.
What about net acquired new online customers? The pandemic has upped this figure for most retailers. But when acquiring new customers is twice as expensive as keeping the ones you have, this measurement doesn’t accurately reflect success either.
What should the new measurement of success be and how should it be calculated?
My answer: Recurring Customer Revenue.
The Software as a Service (SaaS) industry has lived by this metric for years, and retail versions of the model like Stitchfix and other subscription box services have a head start already. Even Amazon has gotten in on subscriptions. Having a recurring revenue stream not only results in a more consistent cash flow, but it also offers predictable volume for inventory management, regular contact with customers encouraging better experiences and loyalty and opportunities to generate more sales — which investors like and can lead to increased valuations.
It begs the question: Could Retail RVI as a Service bring better valuations?
In May, Simon Properties said it was planning to spend $5 billion to save retailers hurt by the pandemic, and has purchased JCPenney JCP, Brooks Brothers, Lucky Brand, and Forever 21 in a joint venture with Authentic Brands. While the move shores up retail stores for their malls, and they’re essentially purchasing their tenants at rock bottom prices, many questions around whether it is delaying the inevitable have arisen, particularly as consumer shopping behavior has shifted online.
I personally am not a believer that people will abandon the in store experience to go completely online…this is Silcon Valley’s wishful thinking.
While it’s too early to discuss the future of malls post-pandemic, I came across a Deloitte study from 2016 which speaks volumes to where the industry needs to go right now, particularly in creating value for shareholders. According to the report, retailers competing on both highly differentiated offerings and experiences delivered solid EBITDA growth of almost 15 per cent per year and revenue growth of nearly 11 per cent. In contrast, retailers competing on value and convenience had compound annual revenue growth of 3.5 per cent and experienced a negative compound annual EBITDA growth of 3.2 per cent.
This proves my point that retailers must move beyond traditional metrics if they want to create value for investors, with experience management at the core. If David Simon were to consider a success metric to be recurring customer revenue, and focus on acquiring new customers with differentiated products and retaining as many of the existing customers as possible with curated experiences, retailers like JCPenney have a prayer. And this could rest in a new model, Retail as a Service. Instead of waiting for customers to wander in and browse, JCPenney could create brand experiences that meet expectations of customers — whether that is monthly personalized subscription boxes, or in-store experiences that delight and incentivize customers to buy more based on the products they want (using voice of consumer data).
It honestly doesn’t matter if a retailer is brick and mortar, online or both. Creating experiences through differentiated product and service packages that are recurrent will keep them from being at the mercy of when and whether a person decides to shop in-store or online. There is consistency and a higher conversion rate. Sounds too good to be true? Well, I think it is a lot easier than retailers are making it out to be. #1: Start with a differentiated product people want. Test to make sure people want it BEFORE you invest in it.
As the industry looks ahead to a post-COVID world, I’d wager to say that for retailers like JCPenney who are looking to survive, success will be based on not just gaining new customers, but retaining them.