5 Strategies the Fastest Growing Retailers are Using to Succeed
Amidst cries of a retail apocalypse the retail sector is growing. eMarketer estimates that retail sales in the U.S grew by 2.8% in 2019. That doesn’t sound like a lot but off of a base of $5.5 trillion in sales it is growth of over $100 billion meaning that some retailers are seeing meaningful increases to their bottom line. But its still turbulent times in the retail industry with over 9,000 store closures in the U.S. in 2019.
What does 2020 have in store for us? It is predicted that the rate of retail sales growth is going to slow, coming in at 2%. It won’t be an easy path to success for any retailer but there are several retailers that have defied the odds and are growing instead of contracting. Some of these retailers include Dollar General (Q3 2019 same store sales: +4.6%) Target (Q3 2019 same store sales: +4.5%) and Walmart (Q3 2019 same store sales: +3.2%). These retailers and several others are performing well and provide clues for what it takes to be successful. Want to know what the secret sauces is? Here are of some of the strategies the fastest growing retailers are using to fend off the competition.
1. Exclusive private label brands
Successful retailers have long known about the power of a strong private label brand. Having a great private label brand gives customers a reason for choosing one retailer over another. If you love Costco’s private label brand Kirkland Signature you can only shop at Costco to get it.
In 2018 the Kirkland Signature brand generated $39 billion in sales for Costco, up 11% from 2017. That is more sales than what Gap and Nordstrom make combined. Kirkland Signature is a key source of revenue for Costco, compromising approximately 25% of Costco’s total sales. The best private brands lure customers in by offering high quality products but at lower prices than national brands. Kirkland Signature branded products are typically 20% cheaper than the national brands sold at Costco.
Once the economy started to recover after the last recession Target’s customers felt that the retailer lost its cheap chic edge. In 2017 Brian Cornell, Target’s CEO announced an ambitious turnaround plan for the company. Introducing new private brands is a key part of that strategy. Since then Target has introduced 20 new private brands. Cat & Jack, a new private branded kids clothing line quickly became a hit generating $2 billion in sales for Target within only one year after launch.
Speaking about its success, Target’s CEO, Brian Cornell said: “we know our guests have many choices for where to shop. We also know some of the things guests love most about Target are the same things that differentiate us in a crowded and dynamic retail environment. We often talk about it as the power of 'and.' We offer unique owned brands alongside a curated selected of national brands.”
The Food Marketing Institute’s research shows that close to 50% of consumers specifically look out for a particular private label branded item from a retailer. Investing in private label brands is not a new strategy, private brands have been around for decades. But guess what? They work. And in a time when online competitors continue to rise private brands help combat the commoditization of products. A bag of Kirkland Signature chips is not just any bag of chips they are chips made with quality and love.
The more options, the more clutter, the more important brands become. How many times have you decided to buy Amazon Basics simply because you didn’t want to sort through hundreds of listings and wanted to make a purchase from a trusted source. Amazon has over 500 private label brands. In an industry with razor thin margins private label brands are also more profitable than national brands with margins of up to 25% to 35%. Having private label brands consumers trust is a strategy that will never get old.
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2. The right value equation
Unemployment rates are at 50-year lows in the United States but wages are stagnant. According to The Pay Scale Index: “since 2006, wages have risen 16% overall in the U.S. But when you factor in inflation, “real wages” have actually fallen 9%. In other words, the income for a typical worker today buys them less than it did in 2006.”
Despite claims of millennials spending all of their money on luxuries like avocado toast they are struggling economically too. In a recent report, the Federal Reserve writes that: "millennials are less well off than members of earlier generations when they were young, with lower earnings, fewer assets, and less wealth."
All of this is bad news for consumers but good news for retailers targeting the price conscious. It’s not a coincidence that the lower end of retail has performed well. Some of the most successful retailers today include Dollar General, Burlington Stores, TJX, Ross Stores, Costco and Walmart. They all target the low end of the price spectrum. Walmart for example, has had 22 consecutive quarters of comparable sales growth. Many consumers started shopping at these retailers during the last recession and kept shopping at these stores once the recession was over. This shift in shopping habits has negatively impacted retailers in the middle of the pricing spectrum like JC Penney, Sears, Gap and Kohl’s.
A report from eMarketer underscores why retailers like Walmart are performing well. When shoppers were asked what the most important factors are for deciding whether or not to return to a brand shoppers ranked value for money first followed by lowest prices.
3. A seamless physical and digital shopping experience
Consumers want what they want through whatever channel is most convenient for them. That could be online, offline or a combination of both. Retailers with the best performance have recognized that the future of retail isn’t just about online sales. Despite cries of a retail apocalypse where businesses are wiped out by online competitors, online sales are still very low as a percentage of total retail sales.
Amazon has 6% share of retail sales in the US. A very large number for one company but hardly a sign that it is taking over the entire retail industry. Instead retailers like Walmart, Target and Home Depot which realize that stores are one of their biggest assets are outperforming others.
With 75% of the US population living within 10 miles of a Target store, Target is able to leverage its store network to provide a desired service in a way that Amazon can’t. For example, Target provides a Drive Up service which allows customers at over 1,100 Target stores to pull into a Target parking lot one to two hours after making an online order and have Target employees bring the customer’s purchase directly to their car. This free service is popular with more than five million orders flowing through it in the first half of 2019. This service is also a key advantage vs. Amazon which only has 475 Whole Foods locations that it can leverage for eCommerce grocery pick up.
In total Target has 1,850 retail locations and Walmart has more than 4,700 locations in the US that it can leverage for this type of omni channel experience. On Target’s Q1 2019 earnings call, Target’s CEO Brian Cornell said: “well over half of our digital growth was driven by same-day fulfillment options: in-store pick up, drive up and Shipt. Put another way, these three services drove more than a quarter of our total company comps growth of 4.8%.”
Walmart has also made a big bet on grocery pickup. It launched the service in 2014 and now more than 2,700 Walmart stores offer grocery pickup and that number is growing. Speaking about Target and Walmart Barbara Kahn, a professor of marketing at the Wharton School said: “what they did that was brilliant was to leverage their stores and sales associates in a way to compete against Amazon on convenience, defining convenience in a different way.”
Home Depot has also found success in integrating its online and offline capabilities. In the second quarter of 2019 approximately 50% of Home Depot’s online orders were picked up in its stores. Speaking about this Home Depot’s Treasurer and VP of Investor Relations said: “first of all, when you think about our sales growth, online sales growth, and what we've seen in the stores, the 50% that's picked up in the stores, as we continue to make that easy for our customers, we are seeing just incredible repeat as we think about transactions. So we're going to continue to lean into things that really simplify the experience for more customers.”
4. A treasure hunt shopping experience
Perhaps there was a time when a retailer could get away with a subpar customer experience. But with so many options for where to shop, the in-store experience is more important than ever. With nearly 90% of retail sales happening in-store the best retailers have figured out what customers are looking for when they shop offline. Spending hours in a store trying to find the perfect dress or throw pillow may not be for everyone. But many consumers love what has come to be known as the “treasure hunt.”
The “treasure hunt” is the shopping experience offered by successful off-price and discount retailers like T.J. Maxx, Ross Stores and Dollar General. If you go to a T.J.Maxx store on a Saturday it may look like a tornado ripped through it but customers love shopping at these stores. These retailers tap into basic human needs such as a craving for novelty and a fear of missing out. Off-price and discount stores sell limited quantities of many items.
The red dress you look at on Tuesday may not be there when you go back into the store on a Saturday to buy it. These retailers have mastered the art of getting customers to go back to their stores often by instilling the fear that if they do not come back soon they might miss out on buying an amazing pair of shoes at 60% off.
These retailers have mastered a formula that keeps customers coming back by institutionalizing novelty. Customers are assured there will almost always be new stock, enticing them to check back in frequently. Unlike the not so hot anymore store in your neighbourhood off-price stores always have hot merchandise that needs to be purchased before its gone.
While not every retailer wants to create a treasure hunt shopping experience the underlying components of having merchandise in limited quantities so there is a fear of missing out, frequently changing inventory so that customers have to come back frequently and offering deals to lure the customers in can be done by any retailer.
5. Laser focus
Many of the fastest growing retail brands over the past ten years are direct to consumer brands. Brands like Warby Parker, Allbirds, Glossier, Casper and Away seem to have come out of nowhere and now are billion dollar companies. The ability to reach a larger audience directly through digital channels is one of the reasons for the hyper fast growth of these companies. But another strategy many of these companies employed with great success was a niche focus when their brands first launched.
Casper launched with a single mattress model and sales of those mattresses hit the $1 million mark in the first month after launch. Glossier launched with a set of only four products: Soothing Face Mist, Perfecting Skin Tint, Balm Dotcom and Priming Moisturizer. Away launched with a single model of luggage. The first run of 2,000 orders of Away luggage completely sold out. Allbirds launched its business with a single all wool sneaker. Allbirds went onto sell one million sneakers within two years.
This success of these brands is not a coincidence. These companies chose to focus. Focus is not easy. Most companies give into the temptation to be all things to all people. But in a crowded retail market it can be easier to stand out by doing one thing really well.
Having only one model or just a few simplifies marketing and makes it easier to become known in an area. Then once a brand has gained traction it can expand into other areas. Steve Jobs once said: "people think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things."
In 2019 Canadian coffee retailer, Tim Horton’s sales were down by $150 million. One of the reasons for the sales decline was too many new menu additions including the introduction of a Beyond Meat Burger and breakfast sandwich. The burger ended up being removed from the menu in September 2019 just two months after launch.
Speaking about the sales decline in 2019 José Cil, CEO of Tim Horton’s parent company Restaurant Brands International said: “we tried to do too many different things.” “You end up being distracted from what’s important because you’re necessarily scattering your resources to tackle a bunch of different things.” Tim Horton’s is now shifting its focus back to the basics like coffee and baked goods.