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Former Saks CEO Steve Sadove on Why Retail Fates Hinge on Culture

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As former CEO and chairman of Saks Inc., Steve Sadove has a lot of opinions about what makes a great retailer today—and his thoughts are informed as much by his 30 years in retail as they are from his experience as a consumer. Just like the shoppers stores are hoping to court, Sadove is big on off price and he’s also as susceptible to experiential retail as anyone else. Here, he shares why the size and scale of department stores make it difficult for them to compete today, what they can do to re-enter the game and the role companies like Warby Parker and Away could play in helping them score with younger customers.

SJ: What are the changes you seeing in retail today and who do you think is doing it right?

SS: If I look at it from 50,00 feet, retail is healthy. Consumers want products. This fall season is probably growing at 4 percent. Comments that retail is dead are far from the truth. The issue is that retail is different. The consumer is king. They know what the prices are and they know where they can get the product and the retailer has to think differently about going to market. The consumer wants three things: convenience, value and experience. And if you are not delivering on those three things you’ve got major problems. And it’s much more complicated than Internet versus stores. There are stores that are doing very well and there are Internet companies that are doing badly. It’s much more about those three dimensions and how you are doing against them.

In terms of those who are doing well. Obviously Amazon is doing wonderfully. They represent 50 percent of the sales on the Internet, but it’s not just Internet companies that are doing well. Look at someone like a Costco, a TJ Maxx, a Burlington or Ross Stores. These are all brick & mortar companies that are doing well. I think Walmart is the best example of a transformational company that wasn’t doing well. Doug McMillon and his team decided to shake it up, bought Jet.com and brought in Marc Lore and executed on multiple initiatives and they are doing much better. You can see it in the stock price. So I think it’s the willingness to adapt and change that is separating the winners and the losers.

SJ: You mentioned Walmart. Does it take bringing in new people, like an Andy Dunn or a Denise Incandela to change the culture?

SS: Companies with existing managements are capable of bringing about change in the culture as well. Culture and mindset that recognizes the consumer is changing faster than you are as a company, that is a fundamental tenant. Everyone thinks that they are changing but the consumer is changing faster and if you are not at that pace, you are just falling behind. Could it be done easier with outside talent, maybe. But with the right insider talent, I don’t know why it couldn’t be done.

Fundamentally the role of leadership is essentially two things: driving organizational strategy and driving the organization’s culture. The role of the leader is to set the tone. Identify not just the direction the company will pursue but what kind of a company you want to be. Are you going to value cost-cutting or innovation? Are you open to change? How are you challenging the organization with new ideas versus merely cost-cutting?

SJ: If Amazon is doing it right today, how can a department store compete?

SS: Department stores maybe one of the toughest retail channels. The challenge for department stores is the consumer wants differentiated product and value, price and convenience when they want it. The old department store model of buying other peoples’ goods, reselling it and doing it efficiently with the cost of brick & mortar and store labor just doesn’t have a margin structure that’s as attractive as when you are vertically integrated. Trying to do all that and at the same time compete with the Amazons of the world is a difficult challenge and they must evolve. Department stores have been consolidating and losing share for a number of years; it’s just accelerated. You have to fundamentally look at the business model and ask yourself if there is another way of doing it.

SJ: What types of things should department stores consider doing to change the model?

SS: It varies. For example, go to Japan where you have an approximate 60 percent concession model. It’s in its infancy [in the U.S.], say at 10 percent to 15 percent at high-end stores like Saks and Neimans. You’re starting to see concession stores in the Bloomingdales and the Macy’s of the world. That’s an example of the evolution of the business model as they become more of a real estate play with the brands. Now you can’t do that in 800 Macy’s. How many stores do you need to have? You’ve got to think differently about it. You have to think about your offering and how to bring it to market so the consumer looks at it differently.

Another opportunity is the Internet brands that are seeing some success and are now looking to go to [brick and mortar] retail. They will run into the same problems of finding retail space and the economics of retail. One of the opportunities for department stores is to become the exclusive providers of the space for hot Internet brands, and that becomes a point of differentiation if you can say, ‘You can buy this great brand on the Internet and you can get it at department store X’. These are examples. There isn’t one silver bullet. It’s going to be all of the above.

SJ: A lot of the majors are leaning heavily on private label. Can private-label still successfully differentiate a department store?

SS: If I look at the younger consumer, the Millennial customer, they want locally sourced, handcrafted, differentiated product. A mass me-too private label brand that isn’t viewed as better or different, won’t work.

Go back to the notion of convenience, value and experience. If the brand delivers against some of that, then sure, private label can be an important part of the strategy.

SJ: How can retailers provide an experience today that drives repeat traffic and sales?

SS: You have to strive for service, relationship, an edited assortment and access to unique product. It could be loyalty programs. All retailers have to find those levers, and it becomes increasingly difficult for department stores because they are so diverse.

Look at the guys that are winning. For instance, Costco. Every time I go in there, I have great fun. It’s always about a find. I don’t walk out without spending hundreds of dollars and half of the stuff I wasn’t even looking for [those items]. Or TJ Maxx. They are turning the product so fast I want to go back every few weeks to see if there is some gem. The experience in a Best Buy is fun with all the boutique shops they have set up. It can be product based. It can be the experience of wandering the store or an experience of it just being fun to be there or more traditional things like a fashion show or cooking demonstration or a book signing.

It’s easier if you are a specialty store and have a point of view, and then you build on that. Department stores have lots of points of view. They have lots of different customer bases. They have a wide range of categories. They must find a way to cater to all those different audiences, and they have so many stores. Having said that, there are department stores that are doing it. Go to Fifth Avenue to Saks and its exciting. Go to Selfridges, to Harrods, to Galeries Lafayette, to Printemps. These flagship showcase stores are department stores and they are wonderful and exciting destinations.

SJ: What about off-price? It’s been a hot category but Neiman Marcus recently announced it will close 11 of its 38 Last Call locations and TJ Maxx recently had a softer than trend quarter.

SS: Off-price becomes very attractive for growth and they can be seductive because they are profitable, but at some point, you do too many of them. To a point they are quite good, until they are not. You have to manage that carefully.

For each company it’s different. Last Call was never an important part of the Neiman strategy, At Rack, for example, even though they had a tough last quarter, Rack plays an important role for Nordstrom, and I don’t think they want to close them. And TJX is still doing well, just look at its market cap. It’s larger than that of all the department stores combined.

Marie Driscoll, CFA is an industry analyst focusing on apparel brands, retailers and luxury goods and providing consulting services to academia, industry, investors and non-profits through her firm, Driscoll Advisors. She can be reached at marietdriscoll@gmail.com.

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