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Faculty Insights

WSB Faculty Debate Retail's New Reality

By Clare Becker

May 13, 2019

Mark Eppli gestures while making a point during a faculty panel
James A. Graaskamp Center Director Mark Eppli answers a question alongside panelists Associate Professor Joann Peck, Associate Professor Hart Posen, and Assistant Professor Jirs Meuris during a discussion on the future of retail. Photo by Paul L. Newby II

Traditional household name brands like Sears and JCPenney are floundering, while at the same time, new forms of consumer commerce such as experiential retail, online and brick-and-mortar hybrids, and automated checkout are on the rise. Jonathan O’Connell (BA ’01), a reporter with The Washington Post and the 2019 Business Writer in Residence at the Wisconsin School of Business, facilitated a faculty panel on what we can expect from this new retail universe.

Participating WSB faculty members were: Mark Eppli, director of the James A. Graaskamp Center for Real Estate; Jirs Meuris, assistant professor of management and human resources; Joann Peck, associate professor of marketing and the Irwin Maier Professor of Business, and Hart Posen, associate professor of management and human resources and the Richard G. and Julie J. Diermeier Professor in Business.

Below are some highlights from the conversation:

O’Connell: As someone who’s covered a lot of the retail failures over the last 10 years since the recession, a question I get many times from readers is, “Why are these companies like Sears that I think of as successful businesses going away so quickly?”

Posen: While the premise of a “retail apocalypse” is sexy, I think it’s completely and wholeheartedly incorrect. I don’t actually think there’s a retail apocalypse. Sears is going away—well, Sears has been a bad retailer for decades. Kmart’s been a bad retailer for decades. Toys “R” Us was bad for a decade; there was a point when they were bankrupt where their real estate was worth more than the ongoing business. Some of these businesses were simply not good businesses. They had nothing unique to offer customers. It’s not a finance problem. It is a strategy problem.

Eppli: I generally agree with Hart that it’s not an apocalypse at all. We do have overbuilding and I think what’s happened to accelerate that is the delivery costs that Amazon is absorbing. They’re taking huge losses on their delivery business. Additionally, there’s the cost of returns. So you might say, “Wait, he didn’t ask about Amazon, he asked about Sears and others,” but it’s relevant because all retailers are needing to step up to that same level. It’s crushing the margins a little bit further, and those weaker stores are getting pushed out.

O’Connell: A recent trend that I’ve seen is focused on retail that is experience oriented. Even the movie theaters, for example, went from where every single movie theater you sat in felt the same to now, where there are options for reclining seats, reserving your seat ahead of time, you can have alcohol or even a meal. I can’t tell if experience-oriented retail is a nice little story amidst other larger problems, or if that is really the direction of the industry at large. Any thoughts?

Meuris: One thing you have to consider is that a lot of providing that experience, providing that customer service, requires having employees who care. They are motivated, they want to provide that experience, they want to provide a clean store. If you look at some of these places that are going out of business, they are companies who have notoriously underinvested in their labor. Providing this experience is very important, but another layer to that is you have to invest in your employees to be able to provide that experience, above and beyond what you would get online.

Posen: I agree with you, but I think you undersell what Amazon does. Amazon offers tremendous customer service, not in a standard way, but with technology. That said, I do think that this pure customer-focused notion loses sight of the fact that what’s happening online is fundamental and is part of the structure of fixed costs in this business. It’s easy to offer great customer service and go out of business. How do you do it while scaling up your business so it can be profitable?

Peck: Okay, but look at Warby Parker, Bonobos, Tesla recently—they all have showrooms. These are companies that started online, but what the research is finding is that people shop in stores both to experience the look and feel of products, but also for the social aspects. When people are depressed, some go shopping. Why? Because when you shop, you see other customers, you talk to people, you walk around. All of that helps people feel better.

Joann Peck in a discussion during a faculty panel
Associate Professor Joann Peck discusses how retail is becoming more experiential in order to accommodate consumer preferences. Photo by Paul L. Newby II

Posen: It’s no longer a question of bricks or clicks; it’s self-evident now that it’s both. The question is, how to do it right, right? Because one side leverages tremendous scale economies, while the other side is a very high cost model, so firms are still searching for that balance. Right now, it’s playing out in furniture retail. That is the last domain, where people said, ‘you’ll never buy it online because you want to sit on the sofa, or lie in the bed.’ And it was said about the clothes industry before that. And it’s all been proven to be untrue—people are happy to buy it online. But finding that accommodation so that the online and the in-store is more than the sum of its parts has been trickier. Even Amazon is still searching for that.

Peck: Right. But then look at Sephora. They found out consumers in their stores were using their apps to find out information about products because they did not want to talk to salespeople. So they developed an app that gave them that information in-store, so Sephora is using technology to help address a customer pain point. And it actually alleviates some of the stress on their workers at the same time.

O’Connell: We’ve seen growth for a number of years now in the number of independent bookstores in America, and in some of the big cities, independent hardware stores as well. Places where you could buy everything on the internet, but consumers are choosing to pay a bit extra to purchase it in their neighborhoods. Mark, is this something we’re going to see more often?

Eppli: There are two ways to possibly take that one. One is that the whole ‘buy local’ phenomenon is real. I think particularly with younger consumers, ‘green’ and ‘sustainable’ are not just talking points. Those are things they feel and live by in a variety of ways.

Two, picking up on Joann’s earlier comments about brands like Warby Parker, those are monobrands that are good at doing one thing and one thing well. If you look at some of the retailers who have the highest sales per square foot in their spaces, it’s all monobrands: Apple, Tiffany, Lululemon, Coach. The opposite of that is Macy’s or Bon-Ton. You go in there and you can’t find anything. It’s the old school model of ‘you’re not going to sell anything if you don’t have inventory.’ That’s where we start to break from the past, if we can go mono and do something really well. Lululemon is the classic example of that.

O’Connell: What about automation? How big is this going to be?

Meuris: So, I’ve done a lot of work in the truck driving industry and it’s the same thing that’s been talked about for a very long time—‘oh, we’re just going to have trucks without people and truck drivers will be out of work.’ In the labor market for truck drivers, they’re trying to find new drivers. They are not even close to that. Yes, eventually automation will catch up with that industry as well as with others, but it’s never going to completely take out people. It’s going to transform in some different ways but that human element in the service sector is always going to be there.

Peck: People spend so much time alone that they crave that social connection. There is this human need for contact that’s going to stay. Whether that manifests in retail or some other way is unclear, but I think that’s a fundamental need.

Hart Posen makes a point while seated on a faculty panel
Associate Professor Hart Posen speaks during the panel facilitated by visiting WSB Business Writer in Residence, Jonathan O’Connell (far left). Photo by Paul L. Newby II