Millard “Mickey” Drexler, the former chief executive officer of J. Crew, recently announced his resignation, signaling the “end of an era in fashion,” according to media reports. With the retail industry continuing to reel under the weight of debt and the unrelenting migration of consumers to online shopping, Drexler’s resignation comes on the heels of a recent report last month where he acknowledged underestimating the speed at which technology would change retail.
Whether it is the “end of an era” or not, it is clear the retail industry is at a tipping point. U.S. brick-and-mortar retailers are over-stored, laden with debt and shedding jobs by the thousands while e-commerce sales show no sign of slowing. (The U.S. Commerce Department reported a 15.6 percent year-over-year increase in 2016 and 14.8 percent in the first quarter of 2017.) The NRF predicts “online is going to be the major driver of growth for retail moving forward.”
Add to this the increasing costs of doing business in China, and new tax reforms and regulations on the horizon, and we could be witnessing the end to a once-dominant retail industry that has begun to mirror that of the automotive and banking sectors over the last decade — both of which received government bailouts in order to stem another Great Depression triggered by massive debt.
Meanwhile, retail companies are throwing good money after bad as they scramble to onboard new, yet still unproven, products and services coming out of Silicon Valley that promise to fix what ails brick-and-mortar retail — but do not address the problems. Retail companies need to innovate to have any hopes for survival and must incorporate three elements to drive successful change:
- Speed to market with products that meet consumers’ fast-changing preferences
- Price points which consumers are willing to accept
- Differentiated product
Here is a closer look at four top reasons why the retail sector could be prime for a government bailout.
1. A Perfect Storm of Legislation: Changes to the border tax, NATO and other regulations could result in higher costs for everyday items, triggering a falloff in already slumping brick-and-mortar retail sales. A travel ban could not only further reduce international traffic to U.S.-based retail (a recent story by TechCrunch showed an average decrease in U.S. tourism’s market share of 11 percent year-over-year, during October 2016 to March 2017), but possibly reduce demand for American brands overall by countries displeased with decisions being made by American leadership.
2. Retrenchment of America’s Largest Private Employer: Retail is the largest private employer in the U.S., according to the National Retail Federation, which reported that it directly and indirectly supports 42 million jobs. A May article in National Review stated that there are 17 times as many retail jobs as there are jobs in automobile manufacturing, 100 times as many retail jobs as there are steel jobs, and 210 times as many Americans working in retail as in coal mining. With the March jobs report showing the retail sector lost 30,000 positions, with the hardest-hit segment of retail being department stores, continued shedding of jobs could fuel further retrenchment of brick-and-mortar retail, and impact the economy in ways that were deemed critical in previous government bailouts.
3. The Online Retail Advantage: Amazon’s online presence to date has brought it a distinct competitive, and ultimately unfair, advantage over brick-and-mortar retailers. Being online has meant that a retailer can avoid most state-based regulations and tax structures. This huge tax advantage has enabled companies like Amazon to continually introduce discounted items and expanded services like free shipping, whereas retail’s brick-and-mortar presence can not. Change is coming, but it may be too late. Meanwhile, successful online retailers have been adding market share but not jobs. Amazon’s impressive plan to add 100,000 jobs in the next five years, when comparing to Wal-Mart, which employs 2.1 million people and 1 percent of the American workforce, is vastly inadequate.
4. Manufacturing Has Nowhere to Go: Lead times for manufacturing are not changing. Chinese manufacturers are requiring more and larger up-front commitments that allow for little to no flexibility for one-off and on-demand orders. Most retailers and brands have explored every opportunity for product manufacturing. It’s possible that the industry is approaching an equilibrium of costs where companies can no longer simply move manufacturing to another area to gain the cost reductions necessary to achieve their margin targets.
Whether the government continues to allow retail to “right size” at the expense of the American worker remains to be seen. A bailout would give the retail industry debt relief and a chance to innovate and adopt new, proven innovative strategies and solutions in manufacturing, lead time reduction and predictive modeling, just to name a few.
The U.S. government needs to act quickly or be prepared to watch from the sidelines as America witnesses the loss of yet another industry in our great country where just four decades ago, 95 percent of fashion and apparel bought in the U.S.A. was made here.
Greg Petro is president and chief executive officer of First Insight Inc.
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