Physical Retail

After 20 years pursuing a corporate career, winding from telecom to management consulting, to a conglomerate to online travel and finally, to chain-store retail; at the end of March 2017, I hung up my briefcase.

I quit a perfectly good job as a senior executive and officer of a fortune 50 company.

I became an entrepreneur; by choice.

My co-founder (Chandra Shetty) and I started Packyge, Inc. We are incorporated, have angel investment and, we are living the exhilarating life of startup founders. In a frenetic (un-)structure of tasks and activity we are two people trying to create an actual entity out of the ephemeral realm of ideas. We are simultaneously building our product (with help from some awesome folks at Photon Infotech), raising a seed round to properly launch in one geography (please help!), scoping out team members (come join the fight!) and we are for now, based out of 1871, ensconced within the Merchandise Mart here in Chicago, my adopted hometown.

This past week we had our orientation at 1871, Chicago’s Center for Technology and Entrepreneurship; a fantastic place of aspiration, creativity and, ostensibly the center of the digital ecosystem in the Midwest. They told us about the year 1871, when Chicago suffered the great fire. Clearly, no macabre irony is being implied in the name 1871; it is rather to remind us of the great rebuilding that Chicago mustered after that fire.

After most of our city was razed to the ground, Chicago rebuilt quickly. In only a couple of decades it held World’s Columbian Exposition; brilliantly depicted in very erudite work by Erik Larsen; Devil in the White City. From the ashes, literally; came Grant Park, Millennium Park and the Art Institute of Chicago.

In those years of rebuilding, many of America’s retail dynasties were created right here in Chicago. Men of unique vision and indomitable spirit such as Marshall Field, Richard W. Sears and Aaron Montgomery Ward started retail businesses which grew for a century. Chicago of those years of rebuilding gave to American retail, principles and operational strategies that are the bedrock of modern retailing. These companies were followed a few decades later by the Walgreen Company which defined the modern drugstore/convenience format and where it was my honor to lead technology and later also digital before starting my entrepreneurial journey this year.

In fact, even though Richard Sears moved his mail order company from Minneapolis to Chicago in late March 1887; the first Sears retail store opened in Chicago on February 2, 1925 in the Merchandise building, ironically the home of 1871. Here today, in life coming full circle; ferocious investment is being poured into Ecommerce and related disruption to light fire to many of these same dynasties in an unprecedented era of creative destruction.

That era cemented the the importance of foot traffic to push revenue through the fixed cost base of retail operations. The method was to make investment in location, inventory and labor to provide service and choice to consumers in a consistent way. Merchants used promotions expertly to persuade consumer traffic into the stores at precise gross margin profitability so net profit fell out of the bottom at the end of every period in a predictable way. Then it was merely tedium to build and expand the format across the country once a profitability elixir was perfected in a small set of stores. Many chains grew leading with capital investment in locations and supply chain; following up with predictable profit predicted by the original profit math. A fail safe formula, over a century old. Rinse and repeat.

As a consequence, retail became a big part of the economy and the employment market. The “consumer” a.k.a retail became a pillar of the economic engine that created GDP growth for generations. Today, from data provided by the National Retail Federation from a report conducted by PricewaterhouseCoopers LLP, retail is the largest private employer in the United States. Retail directly and indirectly supports 42 million jobs, provides $1.6 trillion in labor income and contributes $2.6 trillion annually to U.S. GDP. What’s more, the report also makes clear that retail is American small business. An overwhelming majority of retail businesses (99%) employ fewer than 50 people. In fact, these retailers provide 40 percent – or 11.5 million – of the 29 million jobs in retail. However traditional retail holds flat to declining as Ecommerce as a proportion of retail sales grew from circa 3% in 2006 to almost 9% now. This sounds like something we should fight for with our best abilities. This sounds like the story of American enterprise.

The decline of brick and mortar retail is not news anymore and so a disproportionate amount of these sales secularly go to one company as they move online; Amazon. And Amazon plows all earnings back into growth; famously, focusing maniacally on the customer and not bothering to deliver profit, because ostensibly its investors don’t require it. A see a new elixir similar to the concoction of a century ago, a fail safe formula to grow value of investment without actual profit. Rinse and repeat.

Its not like brick and mortar retailers haven’t been trying. First Ecommerce became a huge area of investment across retail early this century, then we mysteriously did “multi-channel” strategies and to keep things interesting we invented “omnichannel”. “Omni” became the mantra that required unfettered capital investment. All manner of orgs were created, digital marketing, attribution, loyalty programs, personalization. Hundreds of startups iterating and incrementally improving approaches to these strategies. However, step back and do a gut check, on a macro basis whatever we are doing quantitatively isnt delivering what we expect it to. Clearly the collective approach used in retail including digital are not working. Foot traffic is declining. Average Unit Revenue is declining and Average Order Value is declining. The great waterfall of revenue that used to fall over these rocks of fixed expense is drying up and the rocks are showing, showing ugly.

As this happens, store operators keep cutting stores, labor hours, items for sale, everything; to cut down cost. And they use those savings to try and get customers to come back in by investing in price, in promotions, in omni-channel strategies. The numbers, however speak for themselves. All prices get beaten on the internet and there are always more items on offer on the internet than any physical store. Yet the only differentiation versus Ecommerce which is within the store format and in person customer service is being constantly “optimized” as cost. Wrong place, wrong time.

However, all is not lost. Physical retail that thinks of itself in a different service context is growing. Weaving in digital interfaces to enhance the locality and leverage human “in real life” service is growing many established and even brand new retailers. Data is revealing flaws in old thinking, exposing weaknesses and some retailers are swiftly addressing to become data enabled companies dexterous with incorporation of the digital lifestyle. Amazon itself is joining this bandwagon with their approach to stores.

We here at Packyge think that a new way to think must come about built around these new opportunities. Retail must be rebuilt, not as a digitization of century old processes but rather Retail must be re-imagined and re-implemented to  showcase the value of proximity, of personal (not just personalized) service and of price competitiveness by individual retail category. Consumer instinct should move from “oh I can just order it online” to “I’ll just go get it, its equally easy and not more expensive; I am headed out anyway”.

Mobile changes everything. Web surfing isn’t a thing any more and waiting for the truck from “UPS/Fedex/USPS/whoever your Ecommerce site chose this time for any part of your order” is getting old. In the rock, paper, scissors of paper, web, mobile – mobile wins every time. People look into their phone to seek answers, people like to be out and about, not stuck at home or work. Every third search on mobile phones is location specific. “Where is the closest” is a preface to many, many searches. More and more coming from smart phones. Devices inextricably linked to humans as if chips were embedded in them; as personal as underwear. This past holiday season traffic from mobile devices surpassed the traffic from desktop. More eyeballs are now looking at a mobile phone screen and are geographically closer to retail establishments more times as they do that.

This is a seminal moment for brick and mortar retail to seize the advantage since phones by definition are mobile and location aware. They are nifty in their capability to be messaged upon. Retailers must not just rely on discounts, they must rethink reasons to visit. Physical retail must fight to regain foot traffic  and provide trip incentives to the right cohorts of people at the right times. Every day part should be trafficked for contributed value by hyper-segmenting customers and shaping cohorts to visit at various time of day. Every customer walking in has to be converted into increased long term value by obsessing about customer service and not just on transactional efficiency; amped up on mobile juice. Retailers must fight out of their stores and they must do that with the urgency driven by existential peril.

Chandra and I became entrepreneurs because we think physical retail survives this great fire. It deserves innovation, new thought process and, our best effort to be rebuilt  like our great city after 1871. Too much of our civilization, economy and employment for multitudes depends on it. As it gets rebuilt, it gets built differently. Not with wood and timber of old practices, just digitized; but rather with the re-imagination, planning and foresight that made Chicago a magnificent city for more than a century.

We became entrepreneurs to fight back not because this was expedient and easy. That time has passed. Daniel Burnham who was the director of works from the World’s Colombian Exposition said,

“Make no little plans; they have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone be a living thing, asserting itself with ever-growing insistency. Remember that our sons and our grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty.”

To complete the irony, he also designed the Marshall Field Company building, now called Macy’s on State Street.

We say, #fightoutofyourstores. We at Packyge most definitely will.