Retail Expert Jan Roger Kniffen on the Retail Tipping Point and Why Off-Price Won’t Save Us

Originally published June 19, 2017 in Q&A, Retail

Today’s rapidly changing retail environment has upended most of the traditional ecosystem. To get valuable insight into the current state of affairs, we reached out to one of retail’s elder statesman, Jan Rogers Kniffen, CEO of J.Rogers Kniffen WWE retail investor consultancy. With more than 20 years as a C-suite retail executive with The May Department Stores, including roles in investor relations, Kniffen is uniquely positioned to provide insight into the sector, as he does at CNBC. Kniffen can always be counted on for his sage perspective on industry trends and the long view. Here, he talks mall closures, off-price saturation and executive level shakeups.

SJ: What’s driving the accelerated number of store closings announced this year?

JRK: It is an interesting puzzle. Why now? The answer is economic distress piling up for retailers that have been financially leveraged up (mostly by private equity players) and are in their third or fourth or even fifth year of falling sales. There comes a time when servicing the debt becomes impossible. Retailers in that position have been waiting for sales to improve. That is not going to happen. So, reorganization or liquidation is happening this year faster than any year since the Great Recession. That causes store closings.

The other thing that has happened is the “tipping point.” Every year for the last three years, mall traffic has fallen. And, in those years the traffic fell faster in Q4 than in the other three quarters, and then we saw a recovery in Q1 of each year. Not back to positive traffic but less of a fall than in Q4. That recovery did not happen in Q1 2017, and retailers are finally admitting that they just have too many stores for an environment of ever falling store traffic.

SJ: How did traditional retailers miss this major shift in consumer tastes and the impact of e-commerce?

JRK: Ah, another interesting question. They didn’t “miss it.” They really had no options. What could they do? Close stores in advance and cede market share to competitors? That’s no solution. And it’s not like they did not know that the business was going online. They did. In fact, for most of the department stores, [more than] 20% of sales occur online now. They see it every day. But, online sales for them are still less profitable than in-store sales, so closing stores before they “had to” made no sense.

SJ: What do you see as supply/demand equilibrium in terms of retail stores, and how do we get there?

JRK: I have been saying since 2014 that by 2030 50% of non-bar, non-restaurant sales will be online. If I am correct, we basically have twice as many stores as we need. OK, assuming some sales growth, we may only need to close 40% of the current store fleet. But we need to close a lot! I am on the record saying we need to close about 400 of the 1,000 enclosed malls.

SJ: What about off-price and outlets? Is the pace in this sector going to continue? If not, what do you see as potential roadblocks ahead?

JRK: The answer in both cases is “absolutely not.” The pace cannot continue. The off-price space was virtually non-existent 20 years ago, and today this retail channel is ubiquitous. Yet, TJX Companies (TJ Maxx, Marshalls and Home Goods) continues to open stores in both current and new formats. But they aren’t alone. Ross Stores is also opening new locations, as is Burlington. And then there are the department stores, Nordstrom with Rack, Saks with Off Fifth, and now Macy with Backstage. We are reaching the point where off-price will just mean “low price.” There isn’t enough overruns and excess goods on the face of the earth to supply all of these off-price players. And, outlets have the same issue. We have heard Coach, Kors and Ralph Lauren talk about pulling back from outlets. Neither off-price nor outlet is immune from the Internet or from the trend to experiential spending.

SJ: What product categories are most vulnerable to online adoption next 2 to 3 years?

JRK: We already know what is vulnerable to online in the “foreseeable future,” apparel—both basic and fashion—accessories and footwear.

SJ: What about Amazon and Alexa, algorithms and personal assistants? Are there intangibles that an assistant can’t satisfy when it comes to shopping? What’s the edge for stores?

JRK: There was a time when there really was “help” in the stores. Now, not so much. Now, the customer has researched the product online before she ever gets to the store and she knows more than the “poorly trained” sales person. So, will online personal shoppers be perfect? No, but they will get better…and in store seems destined to get worse. There are a few retail tech solutions being offered to improve the “personal shopper” by companies like Findmine, and that may help brick and mortar fight the personal assistants that are coming online, but online seems to be winning.

SJ: What surprises you most about today’s consumers?

JRK: I don’t think much is surprising. The consumer is in great shape: [the] best credit ratings in years, and everyone working who wants to, rising wages, rising asset values (especially houses) low energy costs, low interest rates, and high consumer confidence. The only surprise is that the consumer prefers experiences to “things” so all the favorable macro-trends aren’t generating sales momentum in brick and mortar retail.

SJ: Which retailers are doing it right? And what are they doing?

JRK: Right is an interesting term. Pirch is a fabulous store with great experiences. Will it have a decent ROI? Who knows? Williams Sonoma is now 50% online, is that “right?” Probably, but the jury is out if you believe the stock market. Do I love the new Urban Outfitters concept at King of Prussia with the namesake store, Anthro, and Free People all in large format stores with things like blow out bars, Beholden bridal shops, and all kinds of other cool stuff all nestled around a Vetri’s Pizza parlor? Yes, I do. Will it make the ROI that their traditional stores made years ago? I doubt it. Is Amazon doing it right owning online and opening some brick and mortar? Probably. Is Walmart doing it right by buying Jet and letting Jet buy all kinds of interesting online brands and doing buy online pickup in store, order online drive in pickup on grocery (and other items) and growing online by 63% last quarter? Probably, but I doubt if the ROI at Walmart goes up with all of that investment.

SJ: Sounds like doing right and exciting the customer penalizes financial and operating metrics.

JRK: What penalizes financial and operating metrics is having great new competitors that have a zero cost of capital and no requirement to make money on their retail sales.

SJ: Given the importance of technology today, should the composition of the C-Suite change? If so, how?

JRK: Undoubtedly the C-Suite will change, but that doesn’t mean that we do not need merchants. But we do need merchants and leaders who understand data, Internet selling, young customers, how technology works, what designers and designs work, and what is important to the customer whether it is environmental friendliness, customization, unique product, whatever.

SJ: What, if anything, are you optimistic about regarding retail this year?

JRK: I am optimistic about local, online, and off-price retail this year, but longer term, not constructive on off-price.

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.