Global economies may be mostly in recovery mode, but global retail doesn’t seem to be faring much better. And that’s because the retail sector is undergoing the biggest structural transformation in its history.
The apparel markets in the U.S. and Europe combined are worth more than $500 billion, but growth in both places has been a bleak 1 percent to 2 percent.
“Retail, I think it’s safe to say, is an industry undergoing transformation,” Russell said.
But the reason there hasn’t been much of an uptick in retail as economies improve is because too many things are changing too quickly and retail hasn’t yet been able to keep up. Shifts in demographics, globalization, disruptive technology, e-commerce, overstored markets and a shrinking middle tier have all contributed to retail’s relative lack of growth. Add to all of that, the omnipotent consumer wants things better, faster, cheaper and will bail if brands don’t deliver.
Where megabrands, like Calvin Klein, Tommy Hilfiger and Ralph Lauren, were once the winners of most brand equity, they are continuing to lose it to next generation digitally native vertical brands, Russell said. Supply chains are collapsing thanks to things like consolidation, technology-enabled productivity gains and improved speed-to-market.
“Winners in this new paradigm will be either the cheapest or the best. Can’t be both,” Russell said.
Apparel sales at department, chain, discount and specialty apparel stores have fallen steadily for more than a year and foot traffic has declined close to double digits in some cases over the same period. And it’s no secret where those feet are going—they’re staying home and shopping online.
E-commerce has seen double-digit yearly growth over the last year, and online apparel sales are expected to grow nearly 20 percent per year over the next four years, which will add another $50 billion in sales (That’s equivalent, according Russell, to the combined sales of Macy’s, Nordstrom and Kohl’s).
That shift to online commerce is part of what has retail caught in the current markdown cog.
“Apparel prices as a result of all this promotion, are very very pressured,” Russell said.
And even though consumers are spending more in general, the gap between overall spend and what’s being spent on apparel is growing.
“Consumers are buying, but they’re buying differently,” Russell said. They want to take a yoga class when they go to buy activewear, like what Lululemon offers. They want brands that give back and add value to their lives, like Warby Parker.
In the old model of retail, brands had the power. Now consumers have it. In the old model of retail, companies focused on actual currency, whereas now they have to focus on social currency. In the old model of retail a store was just a place and the consumer just needed stuff, but in today’s model, where consumers shop seeking an experience, a store should be that integrated brand experience.
“We used to have a calendar that told us when goods were going to be produced. Now we have a stopwatch,” Russell said. Selling seasons have gone from two to six in less than 10 years, lead times (in some cases, like Zara’s) have come down from nine months to four weeks and lean and fast have become requirements rather than competitive advantages. “The enhanced customer experience has become the new model in stores.”