Emerging Retail Trends

A major theme of 2006 was the resurgence of the department store channel. Department stores have gotten out of the loss-leader business; they have margin-rich products including clothing, fragrances and leather accessories. Department stores today are concentrating on more precise planning and, because many products are direct-to-consumer, they have instituted direct shipments from vendors to consumers, another way to cut costs.
JCPenney has more than $1 billion in directto- consumer business. JCPenney is one of the few non-electronic, non-entertainment retailers that conform to the tenants of the multi-channel model more typically associated with Best Buy, Apple or Barnes and Noble.
The department store resurgence has the capability of defining an end to the generation of spectacular growth in market share of discount stores. It can be argued that the everyday low price concept (EDLP) reached its zenith during 2005 -- and it isn't going to get easier from here. Wal- Mart seems to be shedding market share, and there are no new entries in the discount concept, nor are major consolidations taking place.
Looking at some of the metrics in the industry, note that Q4 2006 earnings before interest and taxes (EBIT) per store at Sears Holdings, JCPenney and Kohl's were all up double-digit percentages, while Wal-Mart EBIT per store in the fourth quarter was down 8.3 percent, yearover- year basis. And yet, Target was up 9.9 percent. Why? Partly due to the fact that Target's culture defies the conventional discount store appearance in merchandising and displays, and they seem to be getting some market share from Wal-Mart. Target is closer in concept to Kohl's than to Wal-Mart, when we exclude perishables and sports and hobby and electronics. As further evidence, it seems Wal-Mart's store remodels will tilt closer to the Target version of discounting and further away from the old Wal-Mart emphasis on price and replenishment.

Migrations away from the price model began a few years ago. Consumers are interested in trading up a couple of dollars in order to have a more coherent shopping experience. They are becoming choosier about what products they are buying, why they are buying them and where they are buying them. This forces the product -- including display and packaging -- to match the environment in which it is sold. Upscale products perform poorly in down-market environments, but better quality environments can successfully sell good-quality, higher-value products.

For 2007 there is the move away from promotional sales techniques to precision planning. What makes precision happen? You have to have total mastery over the data. If retailers don't have their data totally under control, true synchronicity and precision are not going to happen. This is why some retailers are starting to get comfortable closing stores. They know they have to reallocate their asset base in order to improve capital
Earnings Difference Between 2005 and 2006 Before EBIT Per Store
resources to the services they need in order to get precise. Since promo works best when there are higher levels of precision, data precision and synchronicity are the real drivers of promo success, not the other way around. Retailers are trying to build a foundation on clean data, enabled data, data they can really use from platform to platform. Clean data is important because one little error can get embedded into a formula and then into an application, leading to multiplier effects and a bigger, systemic data problem.< div>
Geospatial synchronicity refers to the ability of retailers to know all about the behaviors of customers based on nine digit zip codes. Retailers are beginning to profile right down to the street level and using this data to determine which locations are profitable and which aren't -- and why. Customer intelligence data can now tell retailers which locations are right for its customers, making it difficult to justify why any retailer would not use its cash to exit out of leases on negative cash flow locations.
POS systems can tell us what the shoppers are doing -- what time are they shopping and what promotions are they responding to. Retailers can synchronize their replenishment with their promotions and the consumer response to those promotions.
Technology is precision's delivery system, making IT spending a top priority for any retailer expecting to get on the synchronization bandwagon. A new wave of younger shoppers -- tomorrow's biggest spenders -- is coming at retailers through mobile information technology. Call it social networking or mobility; this is how younger shoppers interact with each other about their experiences and reactions to products and promotions. Retailers can learn about shoppers and what they want through the same technologies; they can interact with them through the same social networking and mobile technology. Looking at the industry through this lens, it is logical that product introductions and big promotional events can be communicated through information technologies, to find out about reactions across vast areas of geography, with the ultimate possibility of IP address and nine-digit zip code matrices telling retailers where to increase specific events. Retailers can start to promote the right products to the right shoppers through the same technologies, thus avoiding excess inventory and markdown expenses.
Technology is at the center of this new world. Technology is the answer to how to move from promotional sales techniques to precision planning, making the full circle from the old promo model to the new promo-precision model of tomorrow.

Richard Hastings is vice president and senior retail sector analyst at Bernard Sands. He also is an economic advisor to The Federation of Credit and Financial Professionals.
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