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March 4, 2002Mauled by the Mall

Elton at the Mall. Saturday's paper, hard up for copy, chortled that Elton John hangs out at the mall or the movies in his spare moments in these United States. Or, so says People, AOL-Time Warner's (NYSE:AOL) money machine and the mainstay of the Luce empire, now that all its other publications are sliding downhill financially and editorially. We sorrow for Sir John, wondering that he has nothing better to do with his time. And yet, this addiction to the mall makes him one with his audiences. They, too, are doing the retail.

Consumers Have Been Shopping. This has been a most curious recession. A slew of economists are still denying that we're in a slump. All the people out of work know we're in the pits. Alan Greenspan knows we are hurting and has chopped interest rates at an unprecedented rate to reflate events. Almost every business person has tales of woe and will privately share fears aplenty. But -- and it's a big but -- the consumer keeps spending on houses and all sorts of other things. The culprit in this slowdown is business investment, which is massively off; but the consumer dances on day and night. We ourselves think the populace is on a last, addictive spending fling, a hangover from the profligate 90s. Even so, economists vow that our non-recession is almost over, though they are only promising a mild recovery. Note, however, that unemployment is turning up again, and that the other economic indexes will not warm the cockles of your heart.

The Age of Wal-Mart. The New York Times' best economic writer (albeit as a guest columnist), Virginia Postrel, has discovered that the avid consumer has made our retail sector a hero in more than one way. Ms. Postrel has the knack of recycling economic research in the popular press. Now she cites a survey from McKinsey, the consulting behemoth, which reports that 6 sectors, retail a standout, account for America's burst of productivity during the 1990s. Retailing chalked up 25% of the productivity gains during the period 1987 to 1995. (See New York Times, February 28, 2002, p. C2.) Wal-Mart's (NYSE:WMT) innovations directly or indirectly caused much of the big leap. Wal-Mart, we would suggest, got the deed done at the back of the store, managing its supply chain and logistics extraordinarily well, while providing a chintzy, serviceless, sterile experience up front. Having displaced Sears Roebuck (NYSE:S) as America's prime retailer over the last quarter century, Wal-Mart now provides less relative value than its predecessor, paradoxically allowing it to obtain more of a monopoly in America's marketplace.

Massification of Retailing. The chains, particularly the discounters like Target (NYSE:TGT) and Wal-Mart, are driving traditional retailers to the wall. In retailing, we seem to be imitating the early days of the car industry, with a similar lack of customization and service. You buy what the juggernaut gives you, becoming a docile, deferential customer who does not make any waves. As a consequence, it has now become more pleasurable to shop at a catalog store (L.L.Bean) or an internet purveyor (Amazon) than at the mall, despite Elton John's predilections.

Mass Customization to Come. The technology is at hard to introduce something besides meat-and-potatoes retailing. Wal-Mart's dominance could be very short-lived. Mass markets are slowing and fragmenting fast, compelling manufacturers and retailers to offer more choices, act with greater flexibility, and reconfigure around the customer. The move to agile, short-run car factories noted in Agile Companies this week is just one sign of where all the markets are moving.

Levi Strauss and others have made it possible for customers to get their clothes semi-cut to order. Speech recognition technology and customer relationship software allow retailers to super-serve loyal or high volume customers. Vast possibilities for follow-on services and products intelligently rendered exist in the car industry which has historically delivered big metal instead of a unique car experience.

Sephora Because. Even without new technology, the independent retailer who wants to do it better has a distinct opportunity. The tug of war between the downtown retailer and the mall chain is instructive. Up to now, the downtown store has cut prices, quality, and everything else in hopes of competing with the mall. This has been a hopelessly flawed strategy. The mall will win every time.

A few years ago Sephora, a French cosmetic chain and subsidiary of French luxury goods company LVMH (NASDAQ:LVMHY), planted a store in an unlikely small Southern town. It's still there, doing a lively trade. An upscale, Asian-fusion, newly opened restaurant, by far the region's best, has just opened a few blocks up the main street. The only strategy is to find out how to go up-market.

A host of other stores, dotting the same thoroughfare, have outdone themselves trying to offer cheap knockoffs, discounts, and the like. They are failing at a mad rate, in a death spiral without either volume or margin. The downtown parking situation, with parking meters, meter-mail tickets, and no parking spaces, guarantees a lack of sufficient volume. They absolutely need an up-market formula, a big lesson for city planners.

P.S. We advise a close look at foreign retailers, where a goodly amount of the most interesting innovation is taking place. Tesco (NASDAQ:TESOF), the British grocery chain, quickly made money in the Internet business, because it closely linked its virtual business to its bricks and mortar. Zara (MADRID:ITX), the Spanish women's chain, has danced around its competitors, by frequent stock changes based on a close reading of trends and its own inventory movement, on manufacturing in Europe instead of Asia, and a little better style instinct than most. Ikea, out of Scandinavia, has put starter home furnishings in the Western World's yuppie households by a surefire combination of modern design and low prices combined with fairly astute store location.


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