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How brands can survive the retail upheaval

In 'The New Rules of Retail,' authors Robin Lewis and Michael Dart assert that three principles will determine whether a business will survive the latest wave of change in the industry.

March 06, 2011|By Jonathan Birchall

The retail sector appears to be undergoing one of its periodic bouts of upheaval.

Department store chain J.C. Penney Co. will launch two online-only retail stores this year. Wal-Mart Stores Inc., the world's largest discount retailer, is planning small, local stores aimed at serving urban neighborhoods. Polo Ralph Lauren, the preppy "lifestyle" brand, recently opened a store in New York that looks more like a mansion than a shop. And Procter & Gamble Co. is franchising a line of automatic carwashes around its Mr. Clean brand.

This flurry of innovation might fit well with the thesis of Robin Lewis and Michael Dart's book, "The New Rules of Retail: Competing in the World's Toughest Marketplace," that the U.S. retail industry is undergoing a wave of fundamental change and that brands and retailers that do not respond are doomed to fail.

Lewis, a former executive editor of Women's Wear Daily, and Dart, head of private equity at retail consulting firm Kurt Salmon, boldly predict that 50% of current brands will disappear in a wave of structural change.

There have been two such upheavals before, they write. The first, starting in the late 19th century, saw the emergence of the first national retailers such as Montgomery Ward, J.C. Penney and Sears, Roebuck & Co. These pioneers sought to satisfy demand for newly available manufactured goods by using the new infrastructure of industrial America.

The next came after World War II, with the proliferation of choices brought by new national brands of consumer goods and the ascendancy of mass marketing. It lasted until the beginning of the current century.

The current upheaval, they say, is driven by the emergence of "total consumer power," as buyers use digital technology to determine what, how and when they buy.

This supremacy of the individual buyer, checking prices on a smart phone, is not a new idea. But this readable analysis provides accessible principles for assessing what retailers must do to survive and tests them against various retail successes and failures.

It outlines three principles that the authors argue will determine which businesses survive, making it a thought-provoking read for retailers and their marketers, investment bankers and investors.

The first is to establish a "neurological relationship" with the customer — the kind of rewarding customer experience that builds an emotional relationship with a brand or store.

Second, brands need "preemptive distribution" so they are available to the customer almost immediately.

Third, retailers need total control of their "value chain" — even if their goods are sold in a department store, they should make sure the items are presented in a way that reinforces the relationship with the customer.

The authors say their research into retail companies broadly supports their three principles. They looked at companies that appeared to be putting the principles into practice and found retailers that rated top in each category were creating more economic value than the rest from 2002 to 2010, while a quarter of those in the bottom quartile went into bankruptcy in 2007.

However, they concede that some retailers that seem to meet the necessary criteria can run into trouble.

It is a thoughtful analysis, and one that helps explain why the J. Crew and Gymboree brands, two of the stronger performers in a rapidly changing retail landscape, recently received private equity investments.

Jonathan Birchall is a New York-based correspondent for the Financial Times of London, in which this review first appeared.

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