The Rise of Luxury and Discount: Exploring the challenges facing retail’s middle.

Interior sales floor
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Jeff Hardy
"Does all this volatility spell the end to traditional bricks and mortar retail stores?  Some  see the mid-market store getting repurposed into a lively and experiential destination."

While many economic indicators suggest that the recession is over and there is a return to normal, the new question is ‘what is normal?’  Volatility seems to be the new normal.  Retail may be now a more stable business since the recession, but there is still very limited growth.  Globally, the industry has seen only between zero and four percent in any given month.  When there is new growth, it is often smaller and in some cases, with an eye to eventual downsizing.  Most retailers are taking a very conscious approach about how they spend their money to remodel or how they plan to invest back into new stores.  Even with the continuous rise of e-commerce, it might surprise some that Amazon, the behemoth in this market sector, lost money in 2012.

Sketches of different iterations of a storefront

Retail sales and marketing has seen a great divide emerging in the market over the past decade.  First there is the great rush to the bottom.  Discount retailers like Walmart and Old Navy push to be leaders as the go-to places for bargain hunters.  Meanwhile other retailers that used to be known as a ‘premium brand’ are pushing themselves further upward into the luxury market.  Companies like Kate Spade New York, Restoration Hardware, HBC, and Holt Renfrew are working hard to find and maintain their place in the up-market sector.  In a time when mid-market department stores like Sears Canada are generally struggling, we are seeing luxury department stores like Nordstrom and Saks Fifth Avenue coming to Canada.

So where does that leave those retailers that cater to the consumers that shop in the middle of the market spectrum?  In Canada and across North America we have seen the demise or near demise of many well established mid-market brands.  Sears Canada, JC Penney, Jacob, Mexx, Reitmans, and others have found themselves shuttered when their customers fled either to the top or the bottom.  Certainly those companies that remain in the mid-market continue to struggle in trying to maintain their appeal and differentiate themselves up against the obstacles of online shopping, ever-shifting brand loyalty, and e-commerce.

So where do the mid-market and, for that matter, all retailers have to go?  In recent years some shoppers will look online, check product reviews, compare prices, and then head to the store to test, touch, try and buy.  This is called ‘web rooming.’  Other customers will visit stores to test, touch and try their desired product but then they might go home or use a mobile device to price compare and order the product through an e-commerce channel.  This is called “show rooming”.  To address these challenges, some retailer’s hope that creating an experience-driven store will pull customers back in.  The buzzword that has come out of this approach is “omni-channel.”  Some in the industry lament the overuse of this expression, but what is clear is that retailers have begun to pay attention over the past few years to these in-store experiences in response to the online sector.  It is not a perfect science because some of those brands who are implementing these experience-driven store designs have reported struggles in creating a seamless customer experiences.  They have found that customers are mainly buying online and picking-up or returning merchandise in-store, or vice versa.  This is hardly a futuristic leap for today’s consumer.

Does all this volatility spell the end to traditional bricks and mortar retail stores?  Some people see the mid-market store getting repurposed into a lively and experiential destination, which retailers like Lululemon are already creating through their community focused yoga classes for example. The store can become a powerful multi-media gathering place where retailers can generate excitement about their brand story and their products and then direct customer purchases through a variety of channels, devices and even product distribution methods..  Mobile and interactive technologies can bring together e-commerce and in-store consumer behavior, allowing brands to both drive purchases while adding value to the brick-and-mortar experience.  If the physical store is to survive it must evolve into an effective platform that offers an experience that cannot be replicated online.  This volatility suggests that only the innovators who embrace change will survive.