An apparent shift from PUSH to PULL marketing is bound to change the retail landscape significantly. I remember reading Bruce Greenwald's book Competition Demystified close to 10 years ago, where I got my first and basic conceptualized understanding on what made big box retailers able to establish local monopolies and attain good returns. Back in the day, a big box retailer could provide and promote products on a very large scale and pull customers in from smaller department stores. If these big box retailers provided a big enough product offering at a good enough price, it would become very hard to pull customers from them - simply because establishing a competing big box retailer locally would eliminate profitability both of the incumbent and the new entrant.
This has changed, and is changing, in a very rapid pace. Additional and huge product offerings of companies such as Amazon, Zalando and Alibaba, can circumvent these locally established monopolies - which in turn changes the way consumers act. If a 15 year old girl wanted to go get some new fancy clothes 15 years ago, to a greater extent she had to get to whatever cloth store she could find within her vicinity and look through the available product offering. She was in a sense pulled to the store where she was PUSHED whatever clothes she would find suitable. This was a very nice place to be in if you owned the cloth store. Today's consumers have plenty of more choices, which forces the competition to PULL consumers by becoming much better as providing just what the customer wants. It's harder to get a "unique" product offering when buying at your local store. I believe this and general convenience is a big factor in terms of driving consumers online, and eroding existing moats around big box retailers as well as department stores. Owning H&M, SEARS, JC Penny or Radio Shack just isn't what is used to be.
I remember both Munger and Buffett commenting on the difficulties on the retailing business many times. One clear memory is the way Munger told the audience at the Berkshire Hathaway Shareholder's meeting in 2016 that they got burned so hard on retailing back when they started, that they pretty much never approached the retail business the same way after that. Buffett on the other hand concluded that if you wanted to be a successful retailer in the future, you were not going to beat Bezos at his own game: "You simply can't out-Bezos Bezos". Another aspect is that a company that has used a certain channel in a hugely successful way, will be correctly reluctant to change in accordance with a changing competitive landscape. It's not strange that GEICO, being incredibly successful at offering insurance by phone, were reluctant in offering its services online. The telephone had been working so well for them over the years, and they knew how to work it!
In this light, it's not strange that a hugely successful company such as H&M is reluctant to distance itself from what they know best. In fact, it's probably not even advisable. The value of H&M is more-so linked with how well H&M can have a good product offering offline than online, and the recent changes from PUSH to PULL marketing is a main reason why.
Even more so than Buffett, I have a hard time seeing how to correctly participate and make money out of this PUSH to PULL marketing trend. Neither have I understood any good line of attack for companies to revert the trend. Therefore, I would be very reluctant to own mostly anything within the B2C retail landscape at other than extremely favorable prices. I do not believe that today's valuation of H&M reflects such a favorable price.
My headline is provocative to it's nature, but I did have to PULL you here, didn't I? You probably understand this by now. However, just to be clear, I do believe that H&M will continue to earn a lot of money for a very long time. I consider a return to all time high in terms of gross profitability and inventory to be extremely unlikely however.
Thanks for taking your time - all the best,
David
4 kommentarer:
Bra inlägg, det du skriver i början om lokala monopol och hur den situationen förändras as we speak gav mig en tankeställare.
/U
Tack för kommentaren, och kul att det kunde ge en tankeställare. Kan rekommendera boken, även om en del förutsägelser visat sig bli helt episkt felaktiga (Apple comes to mind).
//David
You touch on some interesting topics here. But push or pull marketing, inbound or outbound or whatever you call it don't really suffice as models for explanation. For me, it comes down to three mechanics:
- drawing traffic
- building order value
- conversion/sale
With physical stores, the traffic is created through a mix of marketing and location. City centres attract recreational visits, shopping centres attract "let's get this done now" shoppers. For online stores it's pure marketing on a global arena. With mixed presence you have a bit of both, and they may strengthen or weaken eachother. The physical store still retains the "here and now" advantage but cannot ignore the global competition. The online store must compete globally but may gain an advantage of a local presence. Very few physical purchases exist today that are not pre-studied online in some sense.
Drawing traffic is the first and hardest battle in a mixed online/physical world. H&M's physical locations are effective, but they don't help online sales directly. They do however constantly remind the shopper of the brand. Being top of mind is crucial. Noone ever searches Google for "pants", so fashion retailers need to be precise on organic search, clever with search engine marketing and invest brutally in their brand, connecting with influencers, fashion magazines and such.
BTW: marketing in this context comprises of putting the right product in front of the right person at the right price. This process is an area where online shines, to an extent, but physical stores are neither down nor out.
Building order value is actually rather similar online and in physical stores, just far more flexible and automated online. The customer is already in the store, the first product is in the cart and the price sensitivity is now lower. The physical store may use other means though, like triggering hunger, appealing to all five senses of the customer. Today, few multichannel operators use their online presence in stores, but we do see some change here.
Conversion or closing the sale is a lot easier in physical stores. The smaller traffic is somewhat compensated by a sense of "I already made it here, let's finish this", while some detail such as a too high shipping cost or another unfavourable term may derail the online customer.
I'd argue that the push/pull-dynamic is important for all three mechanics you name, and my main argument is that this dynamic is likely to decrease the moat and value of H&M over time.
In terms of drawing traffic the changing retail landscape makes it easier for incumbents to be attacked by new entrants. My interpretation on how H&M built its success was that they created a strong base and simply expanded its distribution chain to service more customers. Today, many go online to research before they shop, and it's easier for niche players to build a brand (i.e. Cheap Monday), I think this is more likely to hurt than to help H&M.
The building of order value might be done in a similar way online and offline. However, I'd argue that the value of one customer walking into a store is likely to decrease in real terms when customers gets a bigger pie to choose from. Today's 15-year olds have a bigger pie to choose from than they did 15 years ago.
Conversion is also affected by customers adopting more habitual shopping patterns. When you don't need offline solely for your purchases, there could be other reasons for visiting a store than buying an item. Finally, I wouldn't count on the consumer being economically worse off by buying online. Time is valuable, and online can offer consumers more choices (such as fulfillment centers or simply mailing) that can be more cost-effective than the department store.
It's nice to disagree once in a while, although I'm generally in agreement with all your assessments it seems that we interpret the trends in different ways.
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