Retailers are fighting an uphill battle right now. On Tuesday, the U.S. Department of Commerce announced that consumers “sharply curtailed their spending at retailers last month.” This sluggishness, combined with the growing favor of online and omnichannel retail, has seriously challenged the traditional retail industry.
While these trends could prove favorable for consolidation and M&A, navigating the competitive landscape is still difficult. During our recent retail-specific event, attendees discussed the trends in the retail space and the best practices for staying relevant in today’s environment.
Through the conversation, two clear themes emerged: proprietary processes and a high volume of visitors. While these competitive theses underlie many good business models, they are particularly true for both online and offline retailers.
Being able to offer a product, a collection of products, or services that are not readily available elsewhere is the foundation to any successful retailer. One attendee explained that online retail has made price differentiation irrelevant. Since the barriers to entry are so low for the retail industry, nearly every “commodity” good — like generic white turtlenecks, notebooks, etc. — has been reduced to its lowest price. Online retailers are able to undercut most competitors and brick and mortar shops by saving on manufacturing, rent, and marketing costs.
Today’s retailers need to be able to differentiate with proprietary products and/or services. One recurring example at the breakfast was the eyeglass company, Warby Parker. Although Warby Parker neither invented glasses nor offer them at the lowest cost, their home try-on model was unlike any existing service — between their proprietary glasses, home try-on, free shipping, and designed boxes. The ability to offer unique glasses with a unique service has allowed the company to sell at least 500,000 units since its founding in 2010.
For brick and mortar retailers, differentiation can be more challenging. Since they are unable to carry an abundance of products on-site, they often need to be very clear with their differentiation. Many successful stores offer goods rarely available online (i.e. Supreme) or have a very unique experience in their store. By regularly redesigning the store or restocking with new products, the store can offer a unique experience rather than unique products. This model, however, is intrinsically riskier because it can jeopardize regular revenues.
As the roundtable attendees continued the discussion, it became clear that differentiated products and services are not very helpful if your store (online or offline) has few visitors. Identifying the means to secure regular visitors is critical to any successful retailer.
Brick and mortar stores typically drive traffic through traditional marketing strategies and store locations in areas with high foot traffic. The combination usually guarantees a sufficiently steady flow of visitors.
Online retailers, however, are faced with a different challenge: with no physical presence, how do you drive customers to the site? One attendee explained, “You end up using your would-be rent money on online marketing strategies to drive site visits.” Rather than allocating money to rent, online retailers pay for credible social proof — either through social media, endorsements, customer reviews, etc. — to promote awareness and drive traffic to their site.
Another attendee explained that a company he represented had a regular presence in the men’s fashion magazine, GQ. Since the represented company targeted young, fashionable men, the presence in GQ was equivalent to having a store in a high-trafficked location.
Implications for M&A
The ability to achieve and maintain these characteristics of differentiation and traffic can often be accelerated by M&A — and business owners are aware of it. According to recent research from BDO, “an overwhelming majority of retail CFOs (96 percent) expect M&A activity to increase or remain consistent with 2013 levels in the coming year.”
However, there can be deal risks. One attendee explained that transition and transaction risks can jeopardize the current state of retailers. Since these risks are inherent to all transactions, one attendee emphasized a focus on solid management teams. Given the volatility of retail businesses, he said that “two-thirds of a successful retail business is attributable to its management team.” If you can harness those managers post-transaction, it can help exponentially grow the business.