The New Rules of Retail: Competing in the World's Toughest Marketplace

Takes a real approach to describe why some retailers prospered and others failed through each wave of retail history. Lewis and Dart’s use of case examples brings the book to life, clearly spelling out how customers and the competitive environment have changed and how retailers today must connect with their customers and take control of their value chain to not only be successful, but survive.

—Ken Hicks, chairman and CEO, Foot Locker, Inc., and former COO of JCPenney

"The New Rules of Retail: Competing in the World’s Toughest Marketplace is an important and instructive read for industry veterans and newcomers alike. Lewis and Dart provide a practical roadmap for success in the rapidly evolving environment, along with an assessment of the retailers who ‘get it.’ With the authors’ dire prediction that 50 percent of retailers will be unable to survive the transition to Wave III, this is a must-read for everyone in the business today!"

—Jane Elfers, president and CEO, The Children’s Place

This book is an essential read for anyone who is interested in a history of what drives 70 percent of the U.S. economy and the many challenges expected to be faced in the future. Like we are now seeing in politics, the voter/consumer is in the driver’s seat, and those serving her had better take heed.

—Allen Questrom, former CEO, JCPenney, Federated Department Stores, and Barney’s

"The New Rules of Retail is a must-read for students of contemporary retailing. Full of meaningful insights about the current environment, the authors chart the course for a successful retail future."

—Paul Charron, former CEO of Liz Claiborne

Lewis and Dart have written an interesting and thoroughly researched book that traces the evolution of the retail business from the distant past to the looming future. Clearly, they know and understand all the players—well worth reading.

—Marvin Traub, former president and CEO, Bloomingdales

"The New Rules of Retail is an incredibly interesting and a provocative read. I thoroughly enjoyed the authors’ insight on past events. I look forward to debate and dialogue about their predictions for the future."

—Tom Wyatt, president, Old Navy

Lewis and Dart give a very accurate view of the past history of retailing. But more importantly, they offer an insightful and strategic view of the consumers and business models needed to support its future.

—Claudio Del Vecchio, CEO, Brooks Brothers

"The New Rules of Retail shows how to win in an unprecedented environment where consumers have instant access to hundreds of choices for everything they need. Lewis and Dart’s recommendations are dramatic, but they show that the consequences for those who stick with the status quo will be dire. A highly original and insightful book."

—Mark Sarvary, CEO, Tempur-Pedic International Inc.

Lewis and Dart have so many thought-provoking ideas that I used up a box of paper clips marking the pages I wanted my various department heads to read. And they’re easy to follow—I understood the concept of a ‘neurologically connective experience’ right away. All future decisions in retailing and wholesaling will be influenced by this book.

—Bud Konheim, CEO, Nicole Miller

"Lewis and Dart have shown once again that they have their fingers on the pulse of both consumer needs and the ever-changing retail industry. The New Rules of Retail is a must-read for anyone who wants to not only survive but to thrive in the decades to come."

—Kevin M. Burke, president and CEO, American Apparel & Footwear Association

"The New Rules of Retail is a powerful analysis of the tectonic shifts that have transformed this industry, and it reveals the secrets of succeeding in today’s new economic and digital environment. Authors Robin Lewis and Michael Dart know retailing inside and out and their thought-provoking book, with its incisive perspective, proves it."

—Tracy Mullin, former president and CEO, National Retail Federation

THE NEW RULES OF RETAIL

COMPETING IN THE WORLD’S TOUGHEST MARKETPLACE

Robin Lewis & Michael Dart

The author and publisher have provided this e-book to you for your personal use only. You may not make this e-book publicly available in any way. Copyright infringement is against the law. If you believe the copy of this e-book you are reading infringes on the author’s copyright, please notify the publisher at: us.macmillanusa.com/piracy.

CONTENTS

Acknowledgments

PROLOGUE TSUNAMI

INTRODUCTION THE STORY

PART 1

DEFINING THE THREE WAVES OF RETAILING

CHAPTER 1 WAVE I

Understanding Producer Power

CHAPTER 2 WAVE II

Learning about Demand Creation in a Marketing-Driven Economy

CHAPTER 3 WAVE III

The Final Shift to Total Consumer Power

CHAPTER 4 WAVE III

The Transformation

PART 2

THE NEW RULES OF RETAIL

CHAPTER 5 MAKING THE MIND CONNECTION

Neurological Connectivity

CHAPTER 6 REDEFINING THE RULES OF ENGAGEMENT

Preemptive Distribution

CHAPTER 7 THE IMPORTANCE OF VALUE CHAIN CONTROL

The Bottom-Line Winners

CHAPTER 8 WHAT IT ALL MEANS

Control, Collaboration, Collapse and the Chinese

PART 3

THE MASTERS

CHAPTER 9 THE MASTER MODEL

Apparel Retail Specialty Chains

CHAPTER 10 IDEAS FROM THE MASTERS

Wholesalers, Retailers or Brand Managers?

CHAPTER 11 THE TURNAROUND ARTISTS

Masters Returning?

CHAPTER 12 LESSONS FROM SEARS

Success to Struggle

CONCLUSION MODELS FOR THE FUTURE

Notes

Index

ACKNOWLEDGMENTS

As we began to finalize our thesis, we spent many hours and days pouring over what seemed like tons of research, digging for supportive nuggets and even whole veins to back our logic and strengthen our vision of how the transformation of the industry is going to play out.

In the middle of this yeoman’s quest, we realized that between us we had another untapped and enormously rich resource: our past and current professional colleagues; a great number of C-level and senior executives throughout the retail and other consumer-facing industries that we had become friendly with over the years; many academicians; and various industry association leaders.

We sought many of them out and received great insight, much of it profound, and more importantly their positive support and sincere interest in reading our final product.

Others who were not directly involved with our efforts, and many who were simply business colleagues over the years, nevertheless provided knowledge and strategic insights that later became useful in the shaping of our thesis. We want to thank them as well.

At the end of the day, by the time we put pen to paper or fingers to keyboard, we not only knew that our thesis was on track for driving the transformation, but that it was made even more robust through all of our past knowledge sources as well as our direct conversations with the executives whose businesses were in the middle of the fundamental changes taking place.

More importantly, we were honored that these great friends, colleagues and professional associates, both past and present, were interested enough to give of their time to provide us with invaluable perspectives and knowledge.

Angela Ahrendts, CEO, Burberry

David Bell, Operating Adviser, Pegasus Capital Advisors; Senior Adviser, AOL Inc.

Phil Black, former Publisher, Apparel Strategist; CNN correspondent

Heather Blonkenfeld, Marketing Director, Kurt Salmon Associates

Paul Blum, CEO Emeritus, David Yurman

Pete Born, Executive Editor, Beauty, Womens’ Wear Daily

Pauline Brown, Managing Director, Carlyle Group

Kevin Burke, President and CEO, American Apparel and Footwear Association

Tom Burns, Senior Vice President, Doneger Inc.

Vanessa Castagna, former CEO, JCPenney; former Executive Chairwoman, Mervyn’s

Lee Chaden, CEO Emeritus, Hanes Brands

Paul Charron, Chairman and CEO Emeritus, Liz Claiborne; Senior Adviser, Warburg Pincus; Managing Partner, Fidus Investment Partners

David Chu, Founder and CEO Emeritus, Nautica

Michael Coady, CEO Emeritus, Fairchild Publications

Arnold Cohen, CEO, Mahoney & Cohen

Bruce Cohen, Partner, Kurt Salmon Associates

Mark Cohen, Professor of Marketing, Columbia University Graduate Business School; former Chairman and CEO, Sears Canada

Kathryn Cordes, Director, Global Marketing and Operations, Deloitte

Bill Crain, former Vice Chairman, VF Corporation

Bill D’Arienzo, Founder and CEO, Wm. D’Arienzo Associates

Claudio Del Vecchio, Chairman and CEO, Retail Brand Alliance; owner of Brooks Brothers

John Donahoe, Director, President and CEO, eBay

Jane Elfers, CEO, The Children’s Place Retail Stores

Joe Ellis, author of Ahead of the Curve; former Partner, Goldman Sachs

Pamela Ellsworth, Professor, Department of International Trade and Marketing and Chairperson, Global Fashion Management Graduate Program, FIT

Kathy Elsessor, Managing Director and Head of Consumer Retail Group, Goldman Sachs

Ruth Finley, Founder and President, Fashion Calendar

Ben Fischman, CEO and President, Retail Convergence Inc. brand Rue La La

Mike Fitzgerald, former President, Delta Galil; Senior Vice President, Business Development, Delta Galil

Neal Fox, President and CEO, the Cross brand

Don Franceschini, CEO emeritus, former Vice Chairman and CEO, Personal Products; retired, Sara Lee Apparel

Sally Garcia, Administrative Assistant, Kurt Salmon Associates

Marc Gobé, CEO, Emotional Branding LLC, author of Emotional Branding

Michael Gould, Chairman and CEO, Bloomingdales

Nick Graham, Founder and former CEO, Joe Boxer

Bob Grayson, Founder, Robert C. Grayson & Associates / The Grayson Company

Rob Gregory, former COO and President, VF Corporation

Joe Gromek, Director, President and CEO, Warnaco

Mindy Grossman, CEO and Director, Home Shopping Network

Gilbert Harrison, Founder, Chairman and CEO, Financo

Clark Hinkley, CEO Emeritus, Talbot’s

Brendan Hoffman, CEO, Lord & Taylor

Mary Beth Holland, Founder and owner, Sutton Place Capital Management

Roy Johnson, Instructor, Department of Communication Studies, Baruch College, City University of New York

Ed Jones, Chairman, Jones Texas Inc.

Andy Kahn, Chairman, Kahn Lucas Lancaster, Inc.

Harvey Kanter, President and CEO, MooseJaw

Sonia Kashuk, Founder and owner, Sonia Kashuk beauty brand

Natalie Kennedy, Business Consultant

Renee Klein, Merchandiser, Gilt Groupe

Bud Konheim, Cofounder and CEO, Nicole Miller

William Lauder, Executive Chairman, The Estee Lauder Companies

Margot Lewis, Founder and CEO, Platform Media NY

Claire Liu, Consultant, Kurt Salmon Associates

Walter Loeb, Consultant and Retail Expert

Terry Lundgren, Chairman, President and CEO, Macy’s

Dan MacFarlan, former Vice Chairman, VF Corporation

Margaret Mager, former Managing Director and Business Unit Leader—Retail Industry, Goldman Sachs

Arthur Martinez, Chairman and CEO Emeritus, Sears

Mackey McDonald, former Chairman and CEO, VF Corporation

Bob Mettler, former Chairman and CEO, Macy’s West

Larry Mondry, former CEO, CSK Auto Corporation

Tracy Mullin, former President and CEO, NRF

Jack Mulqueen, Founder and owner, Mulqueen Sportswear

Karen Murray, President, Nautica brand

Tom Murray, President and CEO, Calvin Klein

Ed Nardoza, Editor-in-Chief, Fairchild Fashion Group

Chuck Nesbit, Executive VP and COO, McMurray Fabrics, Inc

Blake Nordstrom, CEO, Director and President, Nordstrom

D. Scott Olivet, Chairman, Oakley; CEO, RED Digital Camera

Kirk Palmer, CEO, Kirk Palmer & Associates

Cindy Palusamy, Consultant, CP Strategy Inc. Partners & Colleagues, Kurt Salmon Associates

Frank Pickard, Vice President and Treasurer, VF Corporation

John Pomerantz, CEO Emeritus, Leslie Fay

Stefan Preston, former CEO, Bendon Intimates

Allen Questrom, CEO Emeritus, Federated Department Stores, JCPenney and Barney’s

Madison Riley, Principal, Kurt Salmon Associates

Bruce Roberts, former President, Textile Distributors Association

Rick Roberts, Cofounder and Partner, Cynthia Steffe Designs

Ellen Rohde, former President, Vanity Fair Intimates

Doug Rossiter, Vice President and Program Director, The Advantage Group International, Toronto

Judy Russell, Publisher, Apparel Strategist; Partner, The Robin Report

Peter Sachse, Chief Marketing Officer, Macy’s

Mark Sarvary, CEO and President, Tempur-Pedic

Chris Schaller, former CEO, Forstmann & Co.

Denise Seegal, former President, Liz Claiborne

Mike Setola, President and CEO, MacGregor Golf Co.

Pam Grunder Sheiffer, President, P. Joyce Associates

Jane Singer, Marketing Consultant

Tony Spring, President, Bloomingdale’s

Marty Staff, CEO, Joseph Abboud Brand

Cynthia Steffe, Cofounder and Partner, Cynthia Steffe Designs

Michael Steinberg, former CEO, Macy’s West; Director, Fossil Inc.

Jeff Streader, former President, Kellwood

Trudy Sullivan, President & CEO, Talbot’s

Burt Tansky, former CEO, Neiman Marcus

Jock Thompson, Executive Vice President, Scope Apparel

Olivia Thompson, Marketing Consultant

Miranda Tisdale, Consumer Research Manager, Kohl’s

Marvin Traub, retired CEO, Bloomingdale’s; President, Marvin Traub Associates

Mike Ullman, Chairman and CEO, JCPenney

Paco Underhill, Founder, CEO and President, Envirosell

Hal Upbin, CEO emeritus, Kellwood

Jeanette Wagner, Consultant and former Vice Chair, Estee Lauder

Kenneth Walker, Managing Director, Republic of Innovation

Dee Warmath, Vice President, Retail Insights, NPD

Manny Weintraub, founder and CEO, Emanuel Weintraub Associates

Bill Williams, retired President and CEO, Harry & David

Eric Wiseman, CEO and President, VF Corporation

Mai Mai Tsai Wythes, Business Consultant

Lastly we would like to give a very special thanks to our agents, Edward Necarsulmer IV and Rebecca Strauss of McIntosh & Otis. Without their belief in the relevancy and timeliness of our thesis, and their dogged, unyielding determination to find a publisher, this book would still be but a dream.

And, of course, the ultimate thanks to Airié Stuart who decided to publish this book, and to the editors and staff at Palgrave Macmillan who actually made it happen.

PROLOGUE

TSUNAMI

In April 2010, Millard Mickey Drexler, the CEO of J. Crew, remarked that we were in an era in which we were seeing the comeback of great retailers.¹ This despite the clear fact that, in the wake of the recent recession, consumer confidence was still low. Drexler was observing the return of those retailers whose business models, strategies and consumer focus were great enough not only to carry them through the recession but also to let them make a quick comeback by reporting growth and market-share gains. On the other side were the strugglers, those retailers and consumer businesses losing market share and facing insolvency. Their failure to rebound was due to poor business models and an inability to respond to rapidly changing consumer demands. So, what did retailers learn from the Great Recession?

The Summit

October 29, 2008, was a wind-whipped, gray day, characteristic of New York City in the fall and fitting for the unprecedented and urgent meeting of twenty-one of the country’s leading retail CEOs. The early morning meeting was convened at New York’s Fashion Institute of Technology. Among the assembled group was co-host Burt Tansky, CEO of Neiman Marcus, an iconic guru in the world of luxury and well-known and respected by retailers, designers, and luxury brand leaders around the world. Joining Burt was a group of his fellow retail kingpins: Mickey Drexler of J. Crew, and former CEO of the Gap who led its meteoric growth to become the world’s largest apparel retailer during the 1990s, putting Drexler on the cover of Fortune magazine, following which he took the hit for Gap’s collapse; Lew Frankfort of Coach, Inc., who acquired the brand back from Sara Lee, where it had been stagnating for years, and built it to become one of the most powerful accessories brands in the world; Brendan Hoffman of Lord & Taylor, a young upstart in the retail world who nevertheless was well on his way to turning the long-dormant and stale Lord & Taylor brand back to its previous luster; Claudio Del Vecchio of Brooks Brothers, also a turn-around Messiah, restoring the brand to its position as the arbiter of men’s clothing and sportswear; Mindy Grossman of Home Shopping Network, Inc; who transformed the brand from selling a bunch of stuff on TV to inviting viewers into Wolfgang Puck’s kitchen where he conducts cooking lessons, as one of many addictive viewing experiences now provided by HSN; Michael Weiss of Express, called back out of semi-retirement to rescue the brand he had once built as one of the first apparel specialty store chains in the United States; Tom Murray of Calvin Klein, largely responsible for the designer’s preeminent and powerful position throughout the world; Joe Gromek of Warnaco, who took over when the business was about to collapse and managed it back to profitable growth, including the global expansion of their Calvin Klein retail business; Matt Rubel of Collective Brands, also a pioneer in the world of retailing, new to Collective Brands and already adding to its list of brands, including its own private brands, but also fostering innovation in marketing and accelerating its e-commerce presence; and Jim Gold of Bergdorf Goodman, a young protégé of Burt Tansky, widely respected for his leadership as well as his keen eye for successful luxury products.

Their purpose was nothing short of understanding and addressing the economic tsunami that was just beginning to wash over the entire world, with projected devastating effects on consumer spending, and therefore the entire retail industry. To describe this as a highly unusual gathering of some of retailing’s most powerful and iconic figures—many of them fierce competitors—would be an understatement. However, extraordinary times require extraordinary measures.

And on that same fateful morning in Manhattan, one could find any number of people whose lives were dramatically affected by the enormity of the economic collapse, also reflective of the challenges about to be addressed by the CEO’s. The following were three conversations with individuals who requested anonymity.

First, a regional manager for Linens ‘N Things had just lost her job. After she’d spent twenty years in retailing, this was a devastating loss. Staring at her company’s bankruptcy announcement, she fought back an urge to cry. I knew that we were not doing things as well as we could, but when we got bought by the big private equity guys I thought I was safe. They would not have bought us if we were doing that badly, she said softly, her voice cracking with emotion. Could anyone have seen this coming? Why did we have to go? If I work in retail again I want to be in a place that is going to last. Her story was being replayed across the country, as thousands of employees received similar news from bankrupt retailers. Mary put the envelope on the table, made a cup of coffee and worried about how she was going to pay her bills.

Another aggressive, hardworking retail investment manager had made a fortune for her firm over the previous five years. But it all disappeared in a series of what were, in hindsight, disastrous investment decisions. The most prominent involved Circuit City, which during the years leading up to the crash was a $10–12 billion company. Its depressed share price seemed like an opportunity for someone to buy a large enough stake to force the management team to make the right changes. Susan pursued that strategy, increasing her investment with each market swing and pushing the company to make more and more radical changes. Her only downside risk would have been a private equity takeover with a nice premium to the price she paid. But her bet was against that happening and rather that the company would reestablish itself against its competitor Best Buy. If that happened, the share price would return a substantial multiple.

Neither of those scenarios played out. Circuit City went bankrupt, wiping out everything she had invested. Devastated, she knew this probably meant the end of her career. The hardest thing I ever faced in my life was the firm’s partners, and having to explain to them why I kept going with this. I really need to know for the partners and myself if this disaster could have been avoided. What could I have looked for that would have guided me away from continuing to invest in Circuit City? The reason I lost money was accelerated by the financial crisis, but I missed something that led me to one of the weakest players.

Finally, a typical consumer and avid shopper at the time opened her credit card bill and looked at her new limit. It had dropped from $3500 to $1500. She had never seen this before. In fact, for most of the last few years, her mailbox had been full of cut-rate credit card offers, many of them even offering the ability to defer payments against the principal until she graduated. I thought I was responsible with my payments, but this was a major shock. I knew at that moment that I was going to cut back on my spending and things were going to change.

When pressed on what would have to change, she talked about cutting back on shopping for nonessentials. Glancing around her cramped apartment, she referred to meaningless stuff like this. But then she stopped, leaned forward and