Bruce Winder: Is There A Future for Brick-and-Mortar Stores?

We spoke to Bruce Winder, Co-founder and Partner at the Retail Advisors Network. Bruce saw it all in the retail space, as a senior manager at Canadian retail giant, Canadian Tire. Now, as a consultant and expert, Bruce is helping retailers adapt, and adopt the best practices that will help them survive a changing marketplace.

This interview is the first of two with Bruce, where he discusses why consultants, data guys, and online-only sellers are kicking the proverbial backsides of more experienced brick-and-mortar retailers when they make the move to the physical world. He also discusses how and why big retail is dropping the ball, and how private equity involvement has generally made things a whole lot worse for those companies. (Listen to the podcast, above, or check out the edited transcript, which follows, below.)

DAVID ZWEIFLER, GORDON MAGAZINE (DZ): Thanks for joining us today Bruce.

Is there a sustainable way forward for brick-and-mortar retail? Or, rather, the question “is there a future for retail at all,” is the 800-pound gorilla for this broadcast.

BRUCE WINDER (BW): There’s been a lot of discussion by folks about the retail apocalypse and things of that nature, and it’s really caused a lot of debate in terms of you know what’s happening to retail… is retail going away? The short answer is it’s absolutely not going away. Retail has been in place since the dawn of civilization when people bought and sold or traded things and it’s going to continue on, at least for the foreseeable future.

Having said that the way retail is done is changing incredibly quickly and you know we’ve probably seen in the last five years five to ten years retail change more than probably, you know, the thirty years before that combined. So retail isn’t going anywhere but how it’s done is changing significantly.

Face to Face Retail Is Absolutely Vital

DZ: How do you see retail changing for the survivors, for the winners? One of the things I see a lot of and it drives me crazy is a lot of brick-and-mortar retail that is essentially trying to ape their online-only competitors, with you some kind of retail brick-and-mortar presence thrown in. Their brick and mortar presence isn’t at the core of their business… it’s almost like an afterthought. Is face-to-face still vital and how does that look for the winners in the future in your opinion?

BW: Face-to-face retail absolutely is vital. Brick-and-mortar face to face retail is really important but it depends on the customer segment and it depends on which category they’re purchasing. If you look at highly transactional items or basic value items, i.e. something that would be in Amazon’s wheelhouse – that is, basic consumables. Traditional discounters who really own that — the Targets and the Walmarts of the world — have been challenged quite a bit by Amazon over the last ten or twenty years. That’s because, for some items, you don’t need to have as much interaction. It’s less about shopping for the item it’s less about understanding how it works it’s less about talking to a salesperson and more about really just looking for the cheapest net sort of total cost of ownership of that product.

“Private equity has become incredibly short-term focused…. they stop reinvesting in stores, they stop reinvesting in talent, they stop reinvesting in IT, they stop reinvesting in new product development or research or a new format development, and they start sort of looking for short term wins by mostly cutting costs.”

On the other end of the spectrum you have products that are more fashion or products that require more know-how or products that consumers are more invested in finding out how the product works, or what’s right for them — maybe products that are a little more higher ticket so to speak higher price point.

Brick-and-Mortar Stores Need To Understand Their Role

But it really it’s really a case-specific discussion it varies a bit by demographic. Millennials and Gen Z are very comfortable buying many things online I’ll say almost anything online including cars, whereas some of the older generations might not have that comfort yet, and they might require a store.

Having said all that you know stores and brick-and-mortar stores have to understand what their role is. They have to have a reason for existing. In some cases, they are pick up spots where you pick up online orders. In some cases, they’re places where you can hang out with other shoppers in a bit of a community. In other places it’s somewhere where you learn and experience the brand. I\n other cases you’re curating your own assortment or customizing your own product. So the stores and brick-and-mortar stores are intact, but never has it been more important to clarify and carve out the value proposition of the store, especially as it relates to how it complements online purchasing and mobile purchasing.

DZ: It seems like an immutable law of human nature: if you’re offered an excellent product at a fair price, or a piece of crap almost free, most people take the piece of crap unless it’s a high commitment item or something that they’re really geeking over. People always tend to go for the cheaper item. And to the credit of online-only retailers, there’s a lot of items that used to be considered high-touch, expensive items that you wouldn’t dream of buying online, but are now things people are buying online – including cars. It feels like a lot of retailers are still trying to prove they’re still trying to compete on price they’re trying to compete on convenience rather than creating those face-to-face experiences or figuring out how to become a part of their customers’ lives. And thus, they’re ceding the one real advantage they have. They’re not the lowest cost providers and they can’t be if they’ve got brick-and-mortar to maintain, so they will almost always end up losing on those metrics, or, at least, losing money. Do you feel like there are retailers who are really nailed it to become part of that customer experience, emphasizing the customer experience so that they don’t have to compete on price, outside of like luxury and super high touch super expensive items?

“Face-to-face retail absolutely is vital.”

BW: I mean one example of a company that is a digital native — they started out online as a makeup brand and only recently they’ve launched a few brick-and-mortar stores — is Glossier. I had the pleasure of going to the store in New York in December and I’m the proud father of two Gen Z daughters and we went through their store.

Big Retail Putting The Balance Sheet Before Customers

Their connection to the customer was absolutely unparalleled. I mean they had people walking around talking about the brand — the place was jam-packed. You could try on the makeup or try on the products. Even the way they delivered it to you was incredibly interesting. They had specialists order it with you on it on a tablet and then, on a different floor, someone would put the order together, and a few minutes later it was sent over by a vertical conveyor belt through the walls and was picked up by folks at the front by a concierge and given it to each customer. So you know they really made a connection there and I think the key is is to really try to become connected to your consumer.

A lot of retailers, sadly, they put their balance sheet and their income statement first and their investors first, and they put their customers a distance second. Retail is absolutely the opposite so those folks who are actually putting the customer first and building around the customer — while managing expectations of investors and managing their P&L and their balance sheet while making sure that customers are taken care of — I think they’re gonna do a lot better and they are doing better than the other folks who kind of have it upside down.

DZ: it’s so telling though that you’re citing an online brand that went brick and mortar and they’ve figured out how to create an engaging brand experience and they just entered the brick-and-mortar retail space. Granted they are a technology-centric company, and they’re using technology in really innovative ways in the brick-and-mortar setting to build that level of engagement, Still, long before these innovative technologies came along, there used to be retail experts who built these deep relationships with customers. You think that some retailer would dust one of these people off and bring them out of retirement and help these existing brick and mortar retailers figure it out instead of getting schooled by these upstarts that are coming from online into the physical world.

BW: Yeah it’s a great point. One of the things you can underestimate in retail is if you’re a big legacy or even medium legacy brick-and-mortar outfit, you know from the 90s or 2000s, it’s really difficult to change, or to even keep up with the industry, because you know if you own a bunch of stores you’ve got those assets on your balance sheet. If you’re already doing ok it’s very difficult for companies to make the change required to reposition themselves quickly, especially if they’re a public company. You’ve got quarterly earnings pressure. I would argue that a lot of CEOs and a lot of executives these days in publicly traded companies are really only looking a year out, maybe, because they’re not going to be rewarded financially from the stock market by making long-term investments. Right now there are always folks who are a little different. Nordstrom is a little different — Nordstrom thinks long-term, IKEA is private but they think incredibly long term. There are advantages to the sort of managing expectations. Amazon has done a great job of managing stock market expectations they’re rewarded with share price growth based on top-line growth and every now and then they throw out a profit to keep everyone happy but Amazon has done a good job of conditioning the stock market to let them invest in long term infrastructure.

“A lot of retailers, sadly, they put their balance sheet and their income statement first and their investors first, and they put their customers a distance second.”

DZ: Yeah true they also have the luxury of being able to go a decade without turning a profit, right?

BW: Exactly. That’s what I mean like they’ve been able to control the stock market. And the stock market has bought into it, without having profits, but still giving them incredible share price appreciation.

Big Retail Problems Not Helped By Private Equity

DZ: I’m inferring from your answer to the prior question that there are structural issues in big retail that prevent change or make it difficult to change, and make it difficult to innovate. Those challenge certainly can’t be made any easier by private equity ownership. but it’s not necessarily a private equity problem… or is it?

BW: Private equity is a whole different story and I have my own feelings about private equity in terms of how it can help, or hurt, retail. But even beyond private equity, if you’re a public company you’ve got enormous quarterly pressure to do short-term things. Some of the private companies that have more of a long term investment time frame can do some of the things that are needed, and that’s why companies like Nordstrom have flirted with trying to go private last year. They couldn’t do it but you know they were flirting with going private because they weren’t being recognized in terms of the stock market value.

DZ: I’d love to know when you think private equity involvement is good for brick-and-mortar retail when it’s bad, and if there are preconditions to setting up that relationship that prime it for success.

BW: Private equity is tricky. I’ve worked for a couple of companies that were under private equity ownership and I’ve worked for a couple of companies that weren’t. The big thing that private equity can help a company with is by creating a sense of urgency, and their ability to sort of swoop in like a SWAT team. If done correctly, private equity investors can make significant changes in a short period of time, to reposition the business. Private equity can also help look at bloated expense structures, and really challenge historical issues that maybe weren’t as productive, and retool them in a very quick and motivated fashion. That’s the upside and sometimes it turns out okay, like Dollar General or some of the other companies that have gone private and then sort of relaunched themselves.

“I would argue that a lot of CEOs and a lot of executives these days in publicly traded companies are really only looking a year out, maybe, because they’re not going to be rewarded financially from the stock market by making long-term investments.”

But sometimes it ends very badly. Looking for companies that are undervalued is in the private equity DNA. When they see an opportunity to reposition a business they buy it, and they might buy it for a fairly good price, but when they buy it they usually buy it with a high percentage of debt so it’s a leveraged buyout. You’d have to service that debt and that eats up a lot of earnings and cash flow which leaves you much less available to reinvent yourself.

So if you look at Toys R Us as an example they were bought for a call at six and a half billion.
About five billion of that was debt. They had to keep servicing that enormous debt level. And if you have a bump in operations, if you hit a recession, or you lose market share suddenly when you look at your cash generated from operations, you start to get to the wire where you can’t cover your interest payments.

Another issue that happens with private equity is they become incredibly short-term focused. So you know private equity might buy a business, turn it around, and sell it five to seven years later. But what they might do — and this is not good — is they starve the business for long term, so they stop reinvesting in stores, they stop reinvesting in talent, they stop reinvesting in IT, they stop reinvesting in new product development or research or a new format development, and they start sort of looking for short term wins by mostly cutting costs. And that’s sort of trying to put lipstick on a pig, honestly.

This was the first of a two-part interview with Bruce Winder, a longtime veteran of big retail and a consulting retail expert. You’ll definitely want to tune in for part two of this interview where he discusses how Best Buy became a bright spot in the retail landscape using relatively low-tech tactics, and how Canadian retailers seem to have squandered some precious breathing room ahead of a full onslaught by Amazon.

David Zweifler

David is the founder of Gordon Magazine. David's experience spans investment banking, journalism, marketing and technology.

David Zweifler