In the wake of highly publicized bankruptcies, store closings, and layoffs from some of America’s largest retailers, publications like the Atlantic and Bloomberg have published recent stories on the “retail apocalypse.”
However, a widespread “retail apocalypse” is an exaggeration to say the least. While many retailers have experienced challenges, the overall retail sales in the U.S. grew 4.5 percent, representing a 1.7 percentage point increase in growth from the prior year. And, last year’s retail growth outpaces U.S. GDP’s 4.1 percent growth rate:
The U.S. retail sector is rapidly evolving and is as strong, if not stronger, than ever. And, a strong overall retail sector and labor market pose favorable macro-economic conditions for direct selling to thrive.
Despite a 1.8 percent decline in estimated retail direct sales in the U.S. in 2017 and a decline in people involved, there are many promising opportunities to return to growth. To do this, direct selling must play to its key strengths, capitalize on its key differentiators, and quickly learn from innovative retail leaders outside of direct selling.
Why is there a public perception that retail is struggling? Credit Suisse predicts that a quarter of all malls in the U.S.
Credit Suisse predicts that a quarter of all malls in the U.S. will close within the next five years. Forbes estimates that 10,100 stores closed in 2017, perhaps the worst year on record. Retail casualties so far in 2018 include: Toys R US, Nine West, and Claire’s. And, large department stores like Sears, JC Penney, and Macy’s have all continued with significant numbers of store closures.
Certainly, some retailers have been impacted by the rapidly evolving retail landscape. A Fast Company article titled “The Future of Retail in the Age of Amazon” says, “Culturaltastes have changed. Malls grew too quickly, at twice the rate of the population, from 1970 to 2015. Many retailers succumbed to quarterly earnings pressures, invested in share buybacks rather than their stores, became saddled with private-equity debt, or failed to keep pace with digital trends. What we’re seeing now, industry executives say, is a rational, albeit painful, course correction.”
However if you look at the retail numbers, the overall retail sector is experiencing growth. Forbes reports that despite 10,100 closures, there were 4,080 net store openings in 2017. The retail sector isn’t collapsing. It’s evolving.
What areas of retail are doing well?
- E-commerceWith giants like Amazon and Walmart (and its jet.com) leading the way, e-commerce is certainly a large component of overall retail growth. And, Euromonitor research below indicates it’s not expected to slow down any time soon:
Even with this explosive growth, e-commerce still represents less than 10% of retail. - Omnichannel not multichannelThere’s a trend toward online retailers expanding into brick & mortar (e.g. Amazon with Amazon Books, Amazon Go, and Whole Foods, Warby Parker, Blue Apron, etc.) Similarly, some of the traditional brick & mortar retailers experiencing the most success are the ones that have invested in an online platform that seamlessly complements the in-store experience. Warby Parker wanted to create stores that felt like “an authentic extension of the e-commerce brand.”
- ExperientialUlta Beauty is investing heavily in the in-store experience by providing extensive samples and salespeople with personalized recommendations. The company is one of the fastest growing retailers, let alone cosmetics companies.
- DiscountCompanies like Dollar Tree, TJX, and other discounters are also growing fast. For example, Dollar Tree is expecting to open more than 600 stores in 2018. This discount growth could be attributed to continued thrifty mindsets following the recession, stagnant wages, etc. And consumers may increasingly enjoy a “treasure hunt” experience of finding the best deals.
Where does direct selling stand?
According to the Direct Selling Association’s 2018 Growth & Outlook Survey, after reaching an all-time high in 2015, direct sales decreased 1.6 percent in 2016 and 1.8 percent in 2017 to $34.9 billion in the U.S.
The direct selling wellness sector is still the largest at $11.8 billion in retail sales, but it experienced its first decline in over 10 years. Wellness is followed by services, home & family care/home durables, personal care, clothing & accessories, and leisure & educational in order of size.
In terms of the salesforce, there were 18.6 million people involved in direct selling in the U.S. in 2017. The industry is down 9.3 percent from 2016. One driver of this decline is that companies moved people who were previously categorized as independent representatives away from their discount customer category and into the preferred customer programs. Another possible reason for salesforce decline is increased competition with the collaborative economy for independent contractors.
How can direct selling return to growth?
- Leverage best of brick & mortar and e-commerceWhen done right, direct selling can combine the best of both worlds with brick and mortar and e-commerce, while leveraging its key strengths/differentiators: personal relationships and coaching, supporting a local business person, and providing a low-cost, low-risk way of starting a business.
- Focus on value proposition not cost of products.“The best retailers are embracing what makes them special to counter act Amazon’s quest to dominate commerce.” – Fast CompanyDirect selling tends to offer more premium products, making it much more of a challenge to compete on price. This is not inherently bad as trying to compete on things like price can be a race to the bottom.“Part of the crisis that we’re seeing with retail right now is that if your retail store is merely a place for transaction where you tender cash and you take a product home, and that’s the only value that your store delivers, then you are in trouble,” says Katrina Lake, CEO of Stitch Fix said. “And, I think part of the race to the bottom that we’re seeing is that if you’re in that business, then you are now in a global marketplace that’s all competing for cheapest and fastest.”
Warren Buffet echoes this, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
Similarly, direct selling may struggle to compete with shipping. Retail giants like Amazon and Walmart are able to offer low cost/ free shipping at a loss because they’re able to cross-subsidize with their more profitable parts of their business to prioritize growth and aggressive pricing at the expense of profit. In fact “shipping losses soared to $7.2 billion in 2016 for Amazon from $5 billion in 2015).
- Embrace omnichannel not multichannelMany consumers and salespeople desire a comprehensive, cohesive approach with all of the channels complementing one another in an authentic way that improves the customer experience.
- Enter strategic partnerships to improve on weaknessesAlthough most direct selling companies aren’t well equipped to beat Amazon on shipping directly, they can certainly better compete by entering into strategic partnerships to improve shipping & logistics to better meet customer expectations.A survey by American Express and Forrester found that 57% of North American internet users aged 23-27 said same-day delivery would make them more loyal to a retailer’s brand. Some companies have solved last-mile shipping challenges by using crowd-sourced delivery startups like Postmates, Instacart, and Deliv (source).In fact, Sears, Best Buy, and Kohls are actually doing business with Amazon. For example, consumers that buy any brand of tires can get them delivered to Sears Auto Centers for installation. And, Sears’ Kenmore brand can now be purchased directly through Amazon. Kohls has set aside space in their stores to sell Amazon products, and they have also piloted handling Amazon returns in a couple of its stores. Both of these initiatives have experienced initial success, driving more store traffic (source). Best Buy has partnered with Amazon to sell tvs, etc… (source)
- Focus on the customerIt’s easy to think that Amazon offers free two-day shipping. However it’s actually not free. It’s only “free” if you’re a part of Prime Member, which requires a $119 yearly fee. Over 100 million people now have Prime, representing one of the most successful preferred customer programs in retail.There’s a current industry trend toward creating preferred customer programs. Part of this is the result of resegmentation: companies recategorizing people that signed up as direct sellers only for the discount on product purchasing for their own use to preferred customers. But, as we’ve seeing a cascade of other companies following suit and resegmenting, they’re realizing enormous business value to this.This transition naturally leads to an increased focus on customers. It allows direct selling companies to have much better data and insights into motivations and behavior of both customers and sales people. As management consultant, Peter Drucker says, “What’s managed improves.”
Monica Wood, Global Consumer and Member Insights at Herbalife Nutrition (and DSA Industry Research Committee member) said, “We have always known that distributors and members join Herbalife Nutrition for a variety of reasons including support, great tasting, science backed products, or the business opportunity both for part-time income or a full-time business opportunity. Segmentation has allowed us to more clearly identify our distributors’ and members’ current goals, and to align our resources, communications and promotions more effectively to help them achieve them, and to better support them as their goals change over time.”
Another company that’s seen added value and growth from segmentation is Isagenix. Jeff Kaufman, Director, Customer and Field Insights, at Isagenix (and Industry Research Committee Chair) said, “In 2017, Isagenix implemented its Customer First Program. This program was created in part to help us better distinguish between members who simply want to purchase products and those who also wish to participate in the business opportunity. To do this, we encourage new members to join as customers first. Then those customers interested in the business opportunity may enroll as Associates when they are ready. Following are some of the program’s benefits:
– Simplifying the enrollment and ordering process
– Eliminating the need to collect a customer’s social security number when first enrolling
– Making customer membership more attractive
– Providing the ability to direct relevant and unique communication to each segment
– Expanding and protecting the business opportunity” - Capitalize on desire for supplemental incomeUnemployment is low, nearing full employment, but other metrics that measure health of labor market such as wage growth and people quitting their jobs remain stagnant. The challenge is that with the emergence of the collaborative/gig economy, there are now more than ever opportunities for part-time, flexible contract work. For example, the Internet Association reports 23.9 million people in the “online labor force” in the U.S.Now is certainly an exciting time for retail with the need for evolution more important than ever.
