Retail's Middle Class: RIP?

By Jane Genova - February 22, 2012 | Tickers: JCP, M, JWN, TGT, WMT | 0 Comments

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During upheaval, as we saw in The Great Recession, the elite and bottom essentially made it through. It was the middle which imploded. With the value of a graduate degree in business under scrutiny, THE ECONOMIST predicts programs at the top and bottom will likely survive and the middle ones killed off.  Given the non-stop change in retail, could there be those same dynamics for middle players? Will Macy’s (NYSE: M) and JCPenney (NYSE: JCP) be around in five years?

First, as everyone recalls, there was the threat to brick and mortar from the Internet. Next was the new frugality made necessary by the recession. That was the platform for daily deals and extreme couponing. Then came in-store price comparison via smartphones.   

As a recovery gets under way and things shake out, the high and low ends seem best positioned for the future. Among those the most promising models are the upscale Nordstrom (NYSE: JWN) and experience-economy discounter Target (NYSE: TGT).  A sign of these binary times, Macy’s declared it was more upscale than JCPenney, reports NEW YORK Magazine.  But is it as upscale as Nordstrom?  That could be the rub.

Let’s look at the models on both ends.  Those might provide insight for investors evaluting retail's mid-section.

Elite Nordstrom, FORBES observes, is “killing it again.”  For year ending January 28^th, its sales were $10 billion+, up 7.2 percent from the comparable period and earnings up 11.4 percent to $683 million. Of course, we have to factor in that continuum of what can be considered luxury branding.  That has been in recovery for more than a year, according to research firm MasterCard Advisors Spending Plus. The major driver has been the strong stock market.  However, Nordstrom also stands out because it had a good 2010, with sales up 12 percent from 2009. 

Here are some of Nordstrom’s best practices:

Pulling out all stops for customer service.  That attribute was made famous in the late 1980s by management consultant Tom Peters in his book “Thriving on Chaos.”  Later, it lost its way on that but got back on track when the Nordstrom family returned to  management.  Recent enhancements include sales clerks having online access to inventory.  If the item isn’t in their store they can ship it to customers from another. It is experimenting with one-day delivery.

Globally though, the bar is being raised on customer service.  Online retailer Yoox Group allows shoppers in China to try on shipped merchandise while FedEx waits.  The delivery service will return whatever isn’t wanted.  

Lifestyle sectioning versus branding.  Penney boasts about its stores within its store, based on brands.  Nordstrom clusters merchandise according to shopper preferences, such as classic but affordable.  That approach makes it easier to put together outfits.

Flash sales.  It invested $180 million for flash site HauteLook which unloads excess inventory with the excitement of big bargains and the urgency that they are only available within a short timeframe. Concept was invented by Vente-Privee and refined by GILT Groupe.

Outlet Expansion.  Even the well-to-do love discounts so Nordstrom will open 14 more Rack outlets this year. 

Target is known in the media as the “discount darling.” It retrofitted big box drabness with experience economy ambiance, designer fashions such as Missoni at affordable prices, and ecommerce that reinforced brick and mortar.  On Thursday it will be announcing fourth quarter results and those are supposed to reflect stepped up competition from the traditional big boxes.  For example, during the holidays Wal-Mart (NYSE: WMT) brought back the old layaway plan and provided steep discounts.  Therefore, for the fourth quarter Wal-Mart's sales were $122.3 billion up 5.8 percent from 4Q 2010, but its profits down, at EPS $1.50 versus $1.70 in 4Q 2010.  We have to wonder how long investors will tolerate trading off sales for profits.

Right now, the Target model for discount retail includes:

Design in everything.  A la Apple, Target emphasizes the look of things, including the store layout and lighting, signature red shopping carts with flowing lines, and fashions. 

Integration of click and brick.  What’s online reinforces the Target brand identity for affordable class.  This is the missing piece in logistics for most discount retailers.  Seamless is the new standard.

Boutique short-term mini shops.  It’s partnering with specialty vendors such as The Candy Store, Webster House, and The Cost Bar to provide not easily available merchandise for limited time periods such as six weeks.  That injects constant newness into the shopping experience.

Pioneering spirit.  It will be testing out expanding Apple offerings to the point that it could become the place for Everyman to experience the digital revolution, without having to enter Apple retail itself or an electronics store like Best Buy.

As confidence in the economy increases, consumers might shop and spend more. That could provide the tipping point in retail. They might trade up from big box to a Target.  But if they find the merchandise, prices, and experience they want at a Target they might not consider Macy’s or Penney.  Those whose comfort level is the high end will likely return there and desert the middle.  If they never left, they might need plenty of incentive to check out the mid-section.

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