As downsizing, store closures and bankruptcies continue to sweep through the retail world in 2017, it’s worth taking a step back and looking for insights. A few questions need to be asked when a retail business goes under: Why did it fail? How did that failure manifest? What might be learned? And, interesting as the “why” answers may be, the “how” answers provide the most insight for retailers looking to avoid becoming the next casualty of this current retail apocalypse.
From ‘Why’ to ‘How’
Once we know all the reasons behind a retailer bankruptcy — the “why” — whether it’s debt from a private equity takeover, a supply chain stretched too thin by overly rapid expansion, the fickle nature of young consumers’ apparel preferences, the decline of mall culture, etc. — it’s time to look at the “how.” The “whys” tend to tell us what’s going wrong across the industry. The “hows” show how those problems impacted an individual retailer.
For specialty apparel retailers, such as The Limited and Wet Seal — whose bankruptcies we describe below — those industry-wide problems manifest as a lack of loyalty among one’s own customers.
The nature of loyalty has changed quite a lot in recent times. Now consumers frequent a number of favorite stores and brands, not just one. They no longer identify with a single brand or chain. When the choices are limitless, common wisdom holds that consumers aren’t going to make the same choice over and over again.
To succeed in this environment, a specialty apparel retailer’s unique combination of advantages — price, location, selection, easy return policy or any other differentiator — must be sufficiently strong to ensure that the target audience spends much of their apparel wallet with their brand.
Examining data from NPD’s Checkout Tracking, it becomes clear that consumer loyalty, as emotional an issue as it might be, distills down to pure, cold math. And anything short of about 7 percent of the apparel spend of your own customers leaves little room to survive in today’s environment. Seven percent appears to be your tipping point, and neither The Limited nor Wet Seal was able to reach that level of loyalty, as our data indicate.
- People who bought apparel at The Limited gave only about 5 percent of their apparel spend to the retailer. Rivals such as Target and Macy’s got much higher percentages of the customer’s apparel wallet at The Limited.
- In an even more recent bankruptcy, Rue21 shoppers spent just 3.25 percent of their apparel wallet at the retailer — roughly five times smaller than the share those same shoppers gave to Wal-Mart.
- Wet Seal customers were even less loyal. They spent less than 3 percent of their apparel wallet with that retailer. And among Wet Seal apparel customers, Wet Seal itself was only the 11th most popular place for them to shop.
The Limits of The Limited
The Limited filed for bankruptcy in January 2017, a move that followed a rapid rise and decline at the women’s apparel retailer. The Limited launched as a single store in 1963, expanded quickly and went public in 1969. Its parent company, L Brands, spent much of the Eighties buying other apparel brands such as Victoria’s Secret, Lane Bryant and Lerner New York. In 2007, a private equity investment firm named Sun Capital Partners took a controlling stake in the retailer. Three years later, Sun Capital bought the rest of the company.
Less than six years later, The Limited was no more.
Why? Is it because The Limited lost its pop with the Millennial consumer? My colleague at NPD, chief industry analyst Marshal Cohen posits that The Limited — once an iconic retail brand and the darling child of specialty retail — failed to keep its momentum with each passing generation. The connection between the brand and its customers was lost. Other retailers had better prices, similar styles and rotated looks more quickly. The Limited stands as a negative example of not changing the model to fit the competition.
Wet Seal Dries Up
Just a few weeks after The Limited collapsed, teen apparel retailer Wet Seal announced that it too was filing for bankruptcy. It was the second such filing by the company in as many years.
There are several parallels between The Limited and Wet Seal cases. Wet Seal launched in 1962 under the name Lorne’s. It too grew quickly, acquired a rival brand (Contempo Casuals), and was bought by a private equity firm. Like The Limited, Wet Seal cited growing competition from online retailers and the changing tastes of younger consumers as the reasons behind its bankruptcy filing.
We’d add that the retailer expanded too quickly, and would have benefitted from building exclusivity with fewer stores. Wet Seal was unable to keep pace with younger consumers’ desire shift away from “fashion passion,” as social media image became more important to teens than their wardrobe.
It All Comes Back to Loyalty
Any of the “whys” we’ve discussed would have made it difficult for The Limited and Wet Seal to build consumer loyalty. If shoppers are presented with are a multitude of options, a slew of competitors, and endless inventory at online-only rivals, then none of them is going to show loyalty to only one retailer.
In today’s dangerous and data-driven environment, the metric to watch isn’t same-store sales or gross margins — it’s loyalty. Every retailer and brand should be doing all they can to build customer loyalty and share of wallet, starting with listening to the customer and doing their best to offer what the customer wants, when and through whatever channel they want it. With sufficient loyalty from its customers, a retailer can survive any downturn. But without it, every “why” — debt, online competition, poor locations, new generations of shoppers, you name it — can and will destroy the business.
Andrew Mantis is executive vice president of NPD Group’s Checkout Tracking, a data service that measures consumer buying behavior at the market basket-level, based on receipts for both online and brick-and-mortar retail purchases.
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