Retailers' Woes Have Nothing to Do with Amazon

One more of the most confounding features of modern times is that we have more information than ever before, but less common sense. In short, we have more data, but it doesn't help us because we're unable to commandeer it properly.

Retailing data tells us Amazon.com--which recently had 1 billion USD of sales in 30 hours--is going to destroy traditional "brick and mortar" stores. Others argue 90% of retail sales are still done in-person, so while the internet's share of sales is increasing by 1% a year, traditional retail is not dead.

Everyone misses the point. I visited the local mall today. I live in an affluent area where people have lots of disposable income. Here's what the mall looked like inside: 

Looks dead, right?

The main foot traffic was in the food court, a cafe, Starbucks, Apple, and Hollister (which has somehow solved the puzzle of teenage fashion). With Amazon and other online choices now ubiquitous, we've forgotten the days when internet sales weren't successfully gaining market share and "dot com" was synonymous with "bust."

1. Internet Retailing Was Once Considered a Fad

It wasn't always certain that internet retailers could even survive. Amazon.com was allowed a sales tax exemption for many years because it continually posted losses and claimed poverty. States that tried to tax Amazon soon saw it move completely out of their state to limit the law's ability to tax entities without minimum contacts in a particular jurisdiction.

Recognizing his business's unusual dynamic, Bezos once said, "[W]e don't make money when we sell things. We make money when we help customers make purchase decisions." By the year 2000, Amazon had posted a loss of 1.4 billion USD. At one point, Amazon hired Walmart executives to increase profitability, causing a major culture clash with existing employees, who were generally younger and more urban. Most of the managers poached from Walmart eventually left Amazon, but Amazon's poaching left a bitter taste in Walmart's mouth that persists to this day.

Today, Walmart is more profitable than Amazon but has finally realized it needs to catch up in the online space to prevent Amazon from capturing retail market share as Amazon continually improves efficiency and passes cost savings to customers--just like Walmart. Bezos has always been unperturbed about profitability comparisons: 

"[D]on't worry about our competitors because they're never going to send us any money anyway. Let's be worried about our customers..." 

2. It's All about Inventory, Inventory, Inventory

Stores are expensive to maintain. You've got lawsuits resulting from poor customer service or arbitrary hiring decisions. You've got some customers slipping and falling on your floors--sometimes intentionally. You've got theft, which most Americans don't realize costs retailers about 40 billion USD annually--with the plurality of the theft coming from employees, not customers, in the U.S.

The biggest hassle of retailing, however, is inventory management, not HR. Most retailers live or die by major holiday events and new product launches. If a store buys too many products that later become unpopular, they either have to mark it down--which they can't always do because of complicated MAP, or minimum advertised pricing rules--or return them to the supplier for a fraction of the costs already paid. In some cases, with very popular items, a retailer is not allowed to return any portion of the inventory bought and is stuck with it no matter what. Under such a framework, retailers who overestimate or underestimate customer demand--especially during the holidays--tend to see wild swings in revenue while still dealing with relatively fixed overhead.

Amazon bypasses such issues by theoretically having unlimited shelf space and using algorithms to personalize the shopping experience for each customer. While Macy's and Nordstrom must not only figure out which products are "hot" and stylish, but how to allocate enough shelf space for them--potentially losing sales on less popular but profitable items--Amazon can stock everything. While Gap and Target can't really individualize your shopping experience without assigning you a personal shopper as soon as you walk in the door, Amazon is able to collect information every time you log on its website and browse--even if you don't buy anything. With online retailers' greater abilities to reduce human error and gather reliable customer data, how can brick-and-mortar compete?

3.  Actually, I Lied: It's All about Customer Service

If it's all about inventory management, why isn't Starbucks failing? How come Chick-fil-A has lines every time I visit? Well, have you ever seen the outside of a Starbucks look like this? 

In a local mall's parking lot

Oh, you're going to argue I'm only using food retailers as examples? Ok, why are Apple and Nike so popular? Why did Apple open "brick and mortar" stores several years ago? Why is the Apple store always busy while the Microsoft store across from it in my local mall almost always empty, except for kids trying out video games?

It's the customer service--a long lost art. When you go into any Starbucks, you can personalize your drink any way you like. If you still don't like it, you can demand the barista re-make it. When you have a problem with an Apple product, you can bring it into a store and get it looked at by experts. When I question the workers at the Genius Bar, they take such pride in knowing everything about their products, they often get offended or bemused. When I pointed out one of the outlets in the table didn't work, the worker smirked and said he knew--the implication being, "You can't know more than us about Apple, buddy." Another Apple employee once answered numerous questions about DJI and GoPro drones in depth--which aren't even Apple's own products.

Does Starbucks make money on its 100% customer satisfaction policy? In terms of hard numbers, absolutely not. Does Apple maximize profits by paying higher wages to experts who actually care about their products when it can sell its products online or through other retailers? Nope. But both companies have such high margins, they don't mind losing money here and there if it brings back customers. In short, high margins are supported by excellent customer service, and excellent customer service allows higher margins.

From The Everything Store (2013)

Lots of people shop at Ross and Kohl's, but they wouldn't go there unless they could get 75% off original prices. When you have non-existent customer service, you can lose customers easily unless you keep prices so low, they will tolerate ineffective and surly employees--who might be adding to the $40 billion theft problem while you shop. Unfortunately, you can't quantify the value of consistently excellent customer service in a spreadsheet, so some managers who take over stores with declining YoY revenues focus on everything but the customer experience, dooming their efforts from day 1 and antagonizing formerly loyal employees. 

4.  Overseas Malls Are Mostly Doing Just Fine

Let's contrast the American shopping experience with other countries. Malls are central meeting points in many non-U.S. countries because they offer air conditioning, excellent WiFi, and wonderful food courts.

Discounters haven't made inroads overseas. (A Filipina friend, a highly educated regional manager of a popular pizza joint, has never heard of Ross or Kohl's.)  American brand names still command high prices because MAP restrictions force retailers to compete based on excellent customer service, not low prices. Dirty, unappealing malls exist, but they only have mom-and-pop stores and small businesses, not brand-name retailers. Every single mall overseas I've seen with brand-name businesses is pristine and staffed with people who work hard.

When customer service fails overseas, it's because good intentions often overwhelm common sense. For example, in Panama, as soon as I walked in a sporting goods store--where I eventually bought an authentic Kobe Bryant jersey for 40 USD--an employee asked if I needed help. When I said I was just looking, she still followed me around. At first, I thought she believed I was a potential shoplifter, but then she started being really helpful, like taking the hangers from the clothing I was looking at and pointing to nearby mirrors. I take a long time before buying anything because I walk around for at least 5 minutes, asking myself, "Do I need this? Do I really need this?"

After 5 minutes of walking around doing my usual retail self-questioning, I decided the cute, petite Panamanian employee following me everywhere was working on commission, and it would be rude not to buy something. When I told her I was going to buy the jersey, her expression didn't change. She walked me to the cash register but didn't ring up the sale herself. That's when I realized--she wasn't working on commission. That's just normal overseas customer service.

It's not just in Panama where I experienced "excessive" customer service. Let's take another "P" country, the Philippines. Every time I walked into a middle class or upscale mall, I saw at least three workers ready to assist me in each section. 

Quick--how many store employees do you see? 

Like I said earlier, I'm so used to American customer service--or lack thereof--it took me a long time to realize I just had to patiently deal with overly helpful employees when shopping. 

5. Retail Used to Be a Viable Career and Still is Overseas

Many SE Asian malls, such as ones operated by Ayala Corporation, prefer to hire college graduates as workers, the idea being that such persons will speak English and are able to identify with affluent shoppers. Yet, even in overseas malls where the staff comes from more humble circumstances, I experienced genuinely helpful, normal, and intelligent people. 

When I bought a soccer jersey in a mall frequented by Panamanian locals where workers make 2.60/hr USD, I still got got excellent customer service. Using Google Translate, I was my usual annoying self and asked a lot of personal questions from the employee, including about her wages.  I tried to tip her after she amiably answered my prying questions, but she looked surprised and called to her supervisor, asking if she could accept the tip. Her supervisor cocked an eyebrow, then nodded and looked away, probably having committed a violation of store policy but at least having the discretion and common sense to know when to override it. 

Retail wages in other countries are generally good. In Panama, the worker making 2.60/hr USD could afford to buy a home, which cost her 59,000 USD. (Yes, I ask a ton of questions--I have no shame when it comes to gathering data.)  She took out a mortgage with an 8% interest rate, which most people would consider quite high, but she owns a home--something almost no retail worker in a developed country can do. Sure, she's far away from the Malecon, where a one bedroom high-rise condo costs 250,000 USD in a beautiful area resembling Venice Beach, but she owns property and isn't at the mercy of a fickle or greedy landlord/slumlord.

In hindsight, Amazon's most valuable competitive advantage didn't come from data, but from the underlying premise of Bezo's business model: if a process works, lower-level workers should talk to each other less, reducing the potential for conflict or mistakes. If a customer has to email someone and ask for help, there's a flaw in Amazon's self-contained eco-system, and because Amazon owns every piece in the system, it can keep perfecting its processes until you can get anything you want, however you want it, without needing to contact an underpaid American customer service worker. Even before robots, AI, and drones, Bezos envisioned and created seamless automation, bypassing the risks of imperfect customer-facing service. Amazon is taking market share from "brick and mortar" not because of lower overhead due to the lack of a physical presence, but because it focused on creating a seamless customer experience. In fact, Amazon will be opening a traditional brick and mortar store right across the street from the mall I visited today. That mall is the most posh outdoor mall in the entire city. When it comes to the customer experience, Amazon doesn't mind paying more. 

In contrast to Bezos, Starbucks CEO Howard Schultz made coffee a premium beverage by encouraging employees to create the perfect in-person customer experience. Before Schultz, no one could charge more than 1.50 USD for a cup of coffee, but after seeing the more fashionable coffee experience in Europe, Schultz returned to America, determined to bring a better coffee culture to the States. 

From Schultz's Onward (2011)

Read my last line above--pay particular attention to the word, "culture"--and the words, "human connection," in Schultz's own book. Schultz didn't bring coffee to America. He brought a specific cultural vision and added excellent customer service.

Two CEOs, two seemingly different visions, but the same focus: a perfect customer experience.

6. Conclusion

I don't have an MBA, and I've never managed a retail store, but I'm not surprised customer-facing American retail is suffering. In the absence of sincere, dedicated leaders, relatively low wages make it hard to convince employees to deliver excellent service or to see themselves as a part of a brand's cultural continuity. 

In addition, lower-level employees, including store managers, often lack discretion to satisfy customers, so higher wages alone may not increase initiative. In fact, Costco pays higher wages, but people go there for competitive prices, not customer service. Unsurprisingly, Costco is struggling to find its niche with a younger generation of shoppers who want better overall experiences, not just lower prices. 

If individual American retailers cannot consistently create excellent experiences, then mall operators themselves should. Ethnic malls have a much more diverse tenant mix, which increases foot traffic at different times of the day, alleviating parking woes. Such malls usually have a grocer as the anchor tenant (H Mart, Mitsuwa, etc.) as well as sleek food courts within the grocer itself or the mall, using delicious food and smells to drive traffic. Upscale malls overseas have numerous events sponsored by major brand names--just think of the fun activities and giveaways inside an American sports arena on gameday, and you'll get a good idea of what a Hong Kong mall looks like on a daily basis. American retail is suffering from an identity crisis and is trying to compensate by increasing ad dollars and focusing on image, not experience. Yet, companies like Abercrombie and Fitch (excluding Hollister) and J. Crew, which arguably care the most about their image, are suffering the most. It's time to get back to basics. 

Disclosure: I own shares of ANF, M, TGT, various REITs, and other companies mentioned herein. My positions may change at any time. You are responsible for your due diligence.

10 Reasons to Avoid Cuba (Part 2)

[Continued from HERE (Part 1).] 

5.  Cuba Still Rations Basics, and Prices Make No Sense

By the end of my month in Cuba, I was dreaming of entering a Whole Foods or Target and filling up a shopping cart. This is what Cuba's "supermarkets" sell: 

Your eyes do not deceive you.  You are indeed looking at large cans of tomato paste. Of all the items the store chose to advertise, this is what they felt was their best selection. (Maybe they wanted something large to fill up the window? It's not like they have competition.) I bought two toothbrushes for 50 cents each. I wanted shampoo, but they didn't have shampoo.

If you visit Cuban neighborhoods outside Old Havana, you'll see many people walking with trays of fresh eggs every day. You'll eventually realize Cubans get their food through rationing cards, just like the British did during WWII. As you might expect, a thriving black market exists, driven by remittances and products sent from abroad. My neighbor might live three to a room with a kitchen the size of a small closet, but her two sons own a used Xbox, probably smuggled into the country after bribing a guard.

Cuba claims to be opening up, but it's hamstrung by U.S. sanctions and its own poverty. Any ship that docks in a Cuban port cannot dock in an American port for at least 6 months. As a result, the main countries with trade agreements and enough products to sell solely in Latin and South America are China and Spain. Almost all of Cuba's new cars--which, due to limited supply, cost almost as much as a small apartment in Havana, or about 22,000 USD--are Geelys made in China. (Most of the old cars are Ladas, which are Russian-made and still running after 20+ years.) Everything that consistently works in Cuba is made in China, from buses to fridges to trash pickup trucks. A cynic would say China uses Cubans as guinea pigs to make sure their products work before shipping them to more developed countries, but I didn't see any evidence of inferior quality. 

Cuba is known for having old American cars, but such cars are popular because Cubans don't have sufficient disposable income to justify having any auto dealerships. Once you realize this, the old cars start to look sad. 

Old because Cubans can't afford new cars

They're also a convenient way for Cubans to make money from excitable tourists. A taxi ride in an old American car costs about 5 USD a person, whereas Cubans accustomed to the old cars see them as just another option in the taxi business and pay about 40 to 50 cents a ride. I rode in a few old cars and enjoyed the large and comfy seats, but otherwise, they're nothing special. Just more propaganda from a country that doesn't have much to offer outsiders, forcing it to rely on gimmicks to attract tourists (and foreign currency). 

Just for fun, here's an actual Cuban cop car--try not to laugh: 

I did see one encouraging sign. Cuba recently opened several "supermarket" locations called Jabon y Agua (literally, "Soap and Water"). These stores offer more consumer choices, but their prices make no sense and are unaffordable for the typical Cuban, so it's possible they're another way for Cuba to gouge foreign exchange students or visitors. On the other hand, maybe the stores are a way to compete with the black market. I saw someone offering to sell a Gillette Fusion razor blade to a restaurant owner for 20 USD, twice the price in the U.S.  He didn't have any blade refills, so I'm not sure if the seller understood his own product. 

Cubans cannot afford 9 USD for shaving cream so who's buying?
Why is it over 2x the EU and USA price? 

To summarize, Cuba isn't nostalgic by choice--things are old because of economic failure and poverty. My landlord summarized the situation perfectly: 

6. Cuban Culture Gets Stranger the Longer You Live in Cuba

Cuba was the only country in Latin and South America where I saw a police officer catcall a woman. It's the only LatAm country I've visited where the men look prettier than the women and where construction workers commonly have perfectly coiffed hair and six-packs. 

A Cuban man, whether rich or poor, looks like he's spent hours in front of the mirror before leaving the house. Perhaps young Cuban men think they're required to look like Colombian pop star Maluma (like Justin Bieber, but talented) in public. In a place where few people read for pleasure (newspapers are official government propaganda, and why bother reading if all the dollars are tourism-related?), and televisions show mostly anti-Western propaganda (imported from Venezuela) or music videos, looks matter. After all, brains won't get you the girl when everyone makes the same government salary. 

I always play basketball when I travel, not just because I like the game, but because it's a simple way to determine a country's culture. For example, how often and when do people foul? How hard do they play defense? Are they more interested in showmanship than fundamentals? When there is a dispute, how is it resolved? Do they even let strangers play?

In Cuba, basketball is a theater-like performance. I've never seen so much preening and flamboyance. Games that should have lasted 10 minutes took 30 minutes. When a foul is disputed, no one "shoots for it" and gets back to playing. They take turns demonstrating how upset they are and then argue their case before all the sitting players, who function as an informal jury. Both players will storm off in opposite directions, gesticulating wildly, and then return to the center and loudly proclaim their innocence or the other player's malevolence. This happens every single time a foul is called, whether offensive or defensive. (If Cuba doesn't already have a national mascot, I propose a hybrid of a peacock and an angry chihuahua.)

It gets better. If a particularly lucky shot goes in, the shooter might do a dance that would put former NFL player Ickey Woods to shame. One player, after humping the air and moving forward for 10 seconds, progressed to actually humping his defender, who had to push him away. The shooter continued humping, this time in a stationary pose.

Basketball fundamentals are non-existent because Cubans can't go on YouTube to learn anything, which makes Charles Barkley's 1992 Olympic elbow even more flagrant. When I started doing high pick-and-rolls with two other American tourists on my team, the Cubans didn't know how to switch. One skilled Cuban player, after being subjected to the same play two times, spent a minute dramatically expressing his frustration at his teammates before passing the ball (yes, even when there was no foul, a Cuban player found a way to lengthen the game).

I started to understand when the government gives you a guaranteed job (at low pay) and controls your food supply, there's no place where people can feel heard--except the basketball court or other public places. If your work ethic or words won't get you a promotion, you're not going to suggest doing anything differently--you'll just want to finish your job with minimal effort and go home. In a sense, the basketball court in Cuba, at least for the working class, is one of the only places where results matter. Perhaps that's why they're so adamant about spending as much time on it as possible.

Even in the straightforward world of sports, it's hard not to feel Cuba is a tragedy. I met a wrestler distinguished enough to award medals at the local youth wrestling tournament, and he showed me pictures with famous Cuban wrestlers Mijaín López and Ismael Borrero. He also proudly showed me a video of his 11 years-old son in a tournament. I'm a former wrestler lucky to have had two state champion coaches in high school, but my training started and stopped in high school. (By the way, everyone seems eager to praise teachers, but my high school coaches--the Vierra brothers, Mr. Gilmore, Mr. Cunningham, and my track and field coaches were most responsible for any maturity I might have today, whereas I despise almost all of my high school teachers and wish them fiery deaths.)

With this young wrestler, I was taken aback by the many simple changes that would quickly improve his skill level. The son and I grappled for a few minutes, and I showed him how to make improvements, but I couldn't shake the feeling I was showing him things he should have learned in his first three months of training. Increasing my discomfort was the fact that Cuba is formidable in boxing and wrestling globally, so lack of internet access shouldn't impact institutional knowledge. Yet, somehow, this eager young man's talents were not being developed adequately.

I realized the father was athletic when I saw him at a street food and coffee stall. His forearms were twice my size, and I'm no slouch at 230 pounds. I decided to challenge him to an arm wrestling match to break the ice, and he agreed. Much to my surprise, I won. After seeing more and more Cuban men larger and more chiseled than me, I realized they weren't strong. Even the ones who lifted weights didn't seem strong, and I couldn't figure it out until I saw two random Cubans in a mall.  I didn't think they were Cuban because they wore completely new brand-name clothing and were obviously fit. I walked up to them and asked if they were Cuban, and they said they were. That's when I realized the problem. Poverty destroys everything. 

Most of the Cuban men I saw didn't have access to protein except for eggs. Even if they exercised 3 times as much as me, they wouldn't be able to compete effectively on their diet of rice, beans, and the occasional chicken leg (not to mention the copious amounts of sugar most Cubans ingest). I had become so used to seeing poor Cubans, I literally couldn't believe it when I finally met a few strong and affluent ones. That's Cuba. A place where poverty seeps into every aspect of people's lives, rendering everything hollow, even in places where one's efforts should produce strength.

[To be continued...]