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Takeaways from Day 2 of the Goldman Sachs 25th Annual Retailing Conference

Coresight Research

Key Points

Goldman Sachs held its 25th Annual Global Retail Conference in New York City this week. Listed below are the key takeaways from the webcast presentations.

  • All of a sudden, opening stores is not a bad thing.
  • US retailers are initially entering China markets via online platforms.
  • Lowe’s is to open direct fulfillment center for online orders.
  • The 2010s could be the “lost decade of retail”due to the misallocation of capital.
  • There is still a lot of low-hanging fruit to be picked by retailers to improve efficiency and service quality.

Goldman Sachs held its 25th Annual Global Retail Conference in New York City this week. Listed below are 10 key takeaways from the webcast presentations

1) All of a Sudden,Opening Stores Is not a Bad Thing

Gary Friedman, Chairman and CEO of Restoration Hardware, Inc. (RH), discussed the synergies of maintaining physical stores in tandem with an online presence. Friedman commented that the web is a democratic channel in which all retailers have large product assortments and it is therefore difficult to differentiate between them. He continued his presentation by saying that RH could double its revenues if it started accepting operating margins of around 5% instead of the current margins of 15-17%. In the real world, Friedman said, RH can clearly differentiate itself from other home stores through the superior taste of products in its stores (which he referred to asgalleries) and online-only retailers lack this advantage. His presentation also included photos and videos of RH’s marquee locations, including a multistory structure in West Palm Beach, Florida, that has a rooftop restaurant and another gallery in Chicago, IL, that had long queues of customers. “The physical manifestation of a brand will prove to be more rather than less important,” Friedman concluded.

1) US Retailers Are Initially Entering China Markets via Online Platforms

Carter’s, Inc. and Urban Outfitters both described their entries into online marketplaces in China.

Based on the demand for its products in China markets, Carter’s launched on Tmall Global in June 2017 and is, at present, one of the four most popular brands in its category in China. The company has also partnered with a publicly traded Chinese retailer to open around 60 stores in the past year and a half, and this has resulted in the company online and real-world presences competing against each other. Carter’s has since then also tied up with a new local partner and that partner is investing to further strengthen the brand’s presence in China.This should provide Carter’s with a more profitable business model starting next year.

Urban Outfitters, in contrast, commented that it had stumbled into the China market when it started selling its products on Tmall Globalat the end of 2016, with fulfillment of orders coming from the US. Over the past year, the Urban Outfitters and Free People brands have risen to reach the top five brands on the online marketplace. This success has encouraged the company to create a small local team and explore possibilities of selling its products domestically via Tmall, which has 10–20 times the traffic on Tmall Global. Urban Outfitters continues to perfect its assortment and is considering opening physical stores in China in the next couple of years.

3) Lowe’s to Open Direct Fulfillment Center for Online Orders

Marvin Ellison, President and CEO of Lowe’s, discussed the company’s focus on omnichannel initiatives. Approximately 60% of Lowe’s e-commerce transactions are picked up in stores, he said. As shoppers have increasingly started to begin their shopping journey online, being able to connect digital with the real world is critical, Ellison said. Lowe’s is investing in its logistics and supply chain operations to better fulfill digital orders and will be opening its first pure-play distribution center later this month to facilitate the fulfillment of orders placed online.

The direct fulfillment center will provide Lowe’s with the ability to expand its online product offering and make delivery to customers more efficient. According to Ellison, this will reducea partof the burden on its brick-and-mortar the stores to fulfil online orders, along with freeing up store space and increasing employee productivity. Lowe’s is also testing predictive delivery scheduling for its stores to better plan for shipment arrivals from regional distribution centers.

4) The 2010s Could be the“Lost Decade of Retail” Due to the Misallocation of Capital

Friedman gave an example of a large home retailer—without naming it—that had seen its operating margins decline from 15% to 4% when it attempted to grow its online business. This example was presented in a slide titled “The Web is Not the Most Profitable Channel.”

Friedman called the current period the “lost decade of retail,”as he spoke about how many retailers had, rather unwisely,allocated large amounts of capital to move online in order to compete with Amazon—which sells only online—and, in the process,had destroyed their own business models. He said the current scenario is one of information overload in which time has become a luxury and therefore brands that have tighter control over their supply chains and product assortments are the ones that will become more valuable. He concluded by saying that, “Great brands don’t chase customers, customers chase great brands.”

5) There Is Still a Lot of Low-Hanging Fruit to Be Picked by Retailers to Improve Efficiency and Service Quality

Ellison said that his team at Lowe’s has started time-motion studies which are used to measure the time it takes to unload a truck, stock merchandise on shelves, and ring up a customer‘s purchase on the cash register. Measuring and optimizing these activities is essential on account of the time component because the company’s biggest expense is payroll. In a couple of cases, he said, certain categories reported negative comps due to problems with attempts to improve them, and their ultimate solution offers upside to margins. While the company previously assigned more and more people to solve problems, it is temporarily accepting issues such as out-of-stocks even as attempts are made to correct them.

Lowe’s, Ellison continued, is redesigning its organizational structure to ensure that there is one leader in each location who performs a specific function instead of the three that there are at present. Which leader is responsible for what function will also be defined in the new structure along with well-defined metrics for measuring each leaders’ performance.To illustrate this vision, Ellison provided an example of floor employees that focus purely on item-lists rather than helping customers. Ellison also said he wanted to simplify business for floor associates through automation or digitalization to enable them to focus more on customer service.

6) New RH Store Formats Combine Retail, Hospitality and Experience

RH prides itself on the store experience it provides to its customers. Friedman noted that, “most people are shrinking the size of their retail stores or closing retail stores and we’re building the biggest specialty stores anyone’s ever built.” The company’s newest stores cover thousands of square feet and feature in store coffee shops and restaurants. For instance, he said, shoppers queue up outside the RH store in Chicago, IL, for brunch on weekends.

According to Friedman, post RH’s rebranding and increased focus on high-end interior design, per-store revenue has increased significantly. He believes the newest RH opening in New York City will general $100 million annually in sales.

7) Retailers are Implementing Self-Checkout Technology to Personalize In-store Experience

Frank Conforti, CFO of Urban Outfitters, said that the company has implemented self-scan technology at its Herald Square location in New York City and customer response to this move has been very positive. Urban Outfitters sees scan-and-go technology as a great opportunity, not just in terms of reducing and managing in-store labor costs, but also as an opportunity to personalize customers’ in-store experience. This technology gives the brand an opportunity to make recommendations for additional items even as consumers are checking out on their digital devices by sending messages such as, “We noticed that you have been looking at this item in your personal account. Would you like to purchase it now?” Conforti said that the company is going test self-checkout at more Urban Outfitters stores, as well as Anthropologie and Free People stores. If the self-checkout technology performs as well as it currently is at the Herald Square, the company will look to layer other digital and personal enhancements on top of it.

8) Consumers are Responding to New, Limited Distribution Fashion Now More than Ever Before

Blake W. Nordstrom, President of Nordstrom, said that today’s consumer is searching for fresh and limited-distribution fashion. He added that customers have always been looking for newness, and with the access they now have to fashion and product knowledge on their mobile devices, retailers are feeling the pressure to shape up or ship out.He compared fashion to fresh produce and said that there has to be newness and innovation in order for it to be consumed. Once an item become ubiquitous, it will stop resonating with the customers and Nordstrom calls this “perishable fashion.”

At Nordstrom, the team partners with key designers to get distribution and thinks out very carefully how their own stores or retailers at different locations will represent the brand. Nordstrom further said that roughly 40% of its vendor inventory mix is what the company refers to as limited distributed merchandise and the consumer is responding very positively to this model.

9) Retailers are Experimenting with Test Stores and New In-Store Concepts Based on Prototypes to Improve the Customer Experience

Jeff Gennette, Chairman and CEO of Macy’s, Inc., reported that the company is experimenting with 12 of its stores as test stores with the aim of bettering customer experience. Gennette said that Macy’s focus is on retaining existing customers and acquiring new ones by improving the brand’s store experience. The 12 stores serve as a retail test-bed for bringing in new retail categories and new retail content. For example, Gennette said, much of the store space includes renting space to Internet pure-play retailers. Gennette credited its partnership with b8ta, a technology solution platform provider that helps retailers to implement curated shop-in-shops within stores, for enabling this new brand experience. He said that there are hundreds of pure-play retailers that are interested in being part of this initiative.

Earlier this year, Macy’s acquired Story, another innovative retail store concept where the store operates around a trending theme with highly curated items revolving around it. Rachel Shechtman, Founder of Story, is now the Brand Experience Officer of Macy’s and she has integrated Story’s themed-curation concept into Macy’s campaigns.

10) Loyal Customers are the Best Customers, Driving Between 30% and 90% of Business

Nordstrom said his namesake retailer has over 10 million active customers, and that number is growing steadfastly each quarter. He said that the company launched a nontender loyalty program two years ago, and customers under this program make up over 30% of Nordstrom’s customers and account for over 50% of Nordstrom’s business.

Mary Dillon, CEO of Ulta Beauty, Inc., reported that the company has about 30 million people in its loyalty program, most of which the company refers to as “beauty enthusiasts”because they love trying new products and enjoy shopping in person.

Friedman said that in 2016, RH moved to a membership model, which is driving 90% of its business.

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