Is it a Sign of a Weakening Economy? Retailers Are Failing Left and Right

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Posted: May 11, 2016 12:01 AM
Is it a Sign of a Weakening Economy?  Retailers Are Failing Left and Right

Just last week Aeropostale and Sports Authority announced they were closing all of their stores. Other businesses have been struggling to meet investors’ expectations in the retail sector as well. Sears, Walmart, Best Buy and others have been struggling to make a profit in many locations and have announced recently they will also be closing some of their stores. Retailers across the nation need to close about a third of their locations in order to be as productive and competitive as they were just 10 years ago.

This is not only the case in retail but it's happening in the service sector much more quietly. Real estate firms, mortgage operations, insurance companies and other service businesses have way too much square footage. The ‘sticks and bricks’ component of all of these businesses is crushing them in the age of Amazon, Travelocity, Zillow and eBay.

In recent years, I found myself standing in a retail store looking at a product on the shelf and on Amazon at the same time - most of the time I order the product on Amazon while I'm standing in the store. Why? It's cheaper. Many of these service businesses and retail stores are paying upwards of $40-$50 per square foot or more. This puts the retail leasing cost of a Best Buy or Sports Authority at $300,000 per year in smaller cities and $1 million or more per year in larger retail districts/cities.

In metro Atlanta where I live, Amazon has one centrally located fulfillment center for approximately 6.5 million residents. In the sporting goods sector, alone, Sports Authority has ten locations which will be closing. It's nearly impossible for two retailers selling the same products to compete with Amazon's economies of scale. And that is why so many retailers in this country are struggling.

In addition, I find that when I visit many retailers to try out a product the display units frequently are inoperable or the batteries are dead. The one advantage that many retailers have over the online marketplace is the ability for consumers to test the product, ask experts for a demonstration and to walk out of the store immediately with the product. Unfortunately, I find that many stores don't provide demo models; the associates have less knowledge of the product than I do and the stores are frequently out of stock. So because of the retail sector's own incompetence, they have trained me to avoid their stores and shop online.

Most industries in America seem to operate in a comfortable and archaic fashion that doesn’t appeal to the opportunities provided in the modern marketplace. We as people have changed dramatically in this digitized world but retail is still operating as if it’s a non-digital, physical world.

I have found a great deal of success in the housing industry for the last two decades by breaking the archaic rules of the industry. In my own companies, I have removed the cost of large office space. I'm a firm believer in the executive office environment. It's scalable and it shifts the long-term risk of leases for the office center and away from my businesses. It amazes me to drive by 10,000 square foot real estate offices and observe agents who do only a handful of sales per year in a 10 x 10 office - costing their company $5000 or more each year. By contrast, I could work at my kitchen table and meet clients in a Starbucks at virtually no cost while passing those savings along to my consumers without affecting my bottom line. This makes me more competitive and more flexible when meeting with clients.

I was talking with a very successful attorney last week who was about to expand part of his practice. He suggested adding 2000 square feet. His fee-pricing model had to factor in $89,000 per year for additional office space. I suggested he reduce the space to 500-1000 square feet and allow his paralegals to work from home. By doing this he'll have a higher retention rate and far less costs. He will be able to deliver equal or better service due to the higher retention rate of employees. He’ll also be able to deliver better service for similar or less money than his competitors.

As we observe businesses struggle and fail, this is not because of the economic conditions surrounding their industry. It’s not a faltering economy. They are failing because they have not recognized that their role is to provide the best service or product for the most economical price. Consumers are not interested in paying for a big retail shop or a massive corner office - they want great service and a reasonable cost.

I admit. It may feel really good as you walk into your 50,000 foot showroom or your 10,000 foot corner office in a high-rise, but what feels even worse is spending more money each month than your business is earning because you have to charge too much for your product or service to attract clients.

If you provide exceptional service to the consumer that cannot be replicated online (which is very rare in most industries) then you can still apply this philosophy and earn even more money. And, you will be in a position to cut your margins and remain profitable should the market demand it.

I can't speak for everyone, but I assume there are a lot of people like me. If the service provider or salesperson of a product can't provide me with more direction and advice than I can find online then I'm going to buy it from the cheapest place possible.

The best way to improve service or product quality is to reduce the delivery overhead. Many businesses are still trying to remain successful, as they were in the past, without waking up to the future.

And, that is why so many businesses are struggling in America.