By Ben Gamse
In the wake of highly publicized bankruptcies, store closings, and layoffs from some of America’s largest retailers, publications like The Atlantic and Bloomberg Businessweek have published recent stories on the “retail apocalypse.”
However, a widespread “retail apocalypse” is an exaggeration to say the least. While many retailers have experienced challenges, the overall retail sales in the U.S. grew 4.5 percent, representing a 1.7 percentage point increase in growth from the prior year. And last year’s retail growth outpaces U.S. GDP’s 4.1 percent growth rate:
The U.S. retail sector is rapidly evolving and is as strong, if not stronger, than ever. And, a strong overall retail sector and labor market pose favorable macro-economic conditions for direct selling to thrive.
Despite a 1.8 percent decline in estimated retail direct sales in the U.S. in 2017 and a decline in people involved, there are many promising opportunities to return to growth. To do this direct selling must play to its key strengths, capitalize on its key differentiators, and quickly learn from innovative retail leaders outside of direct selling.
Credit Suisse predicts that a quarter of all malls in the U.S. will close within the next five years. Forbes estimates that 10,100 stores closed in 2017, perhaps the worst year on record. Retail casualties so far in 2018 include Toys R US, Nine West, and Claire’s. And, large department stores like Sears, JC Penney, and Macy’s have all continued with significant numbers of store closures.
Certainly, some retailers have been impacted by the rapidly evolving retail landscape. A Fast Company article titled “The Future of Retail in the Age of Amazon” says, “Cultural tastes have changed. Malls grew too quickly, at twice the rate of the population, from 1970 to 2015.Many[BG1] retailers succumbed to quarterly earnings pressures, invested in share buybacks rather than their stores, became saddled with private-equity debt, or failed to keep pace with digital trends. What we’re seeing now, industry executives say, is a rational, albeit painful, course correction.”
However if you look at the retail numbers, the overall retail sector is experiencing growth. Forbes reports that despite 10,100 closures, there were 4,080 net store openings in 2017. The retail sector isn’t collapsing.
With giants like Amazon and Walmart (and its jet. com) leading the way, e-commerce is certainly a large component of overall retail growth. Euromonitor research below indicates it’s not expected to slow down anytime soon:
Even with this explosive growth, e-commerce still represents less than 10% of retail.
There’s a trend toward online retailers expanding into brick & mortar (e.g. Amazon with Amazon Books, Amazon Go, and Whole Foods, Warby Parker, Blue Apron, etc.). Similarly, some of the traditional brick and mortar retailers experiencing the most success are the ones that have invested in an online platform that seamlessly complements the in-store experience. Warby Parker wanted to create stores that felt like “an authentic extension of the e-commerce brand.”
Ulta Beauty is investing heavily in the in-store experience by providing extensive samples and salespeople with personalized recommendations. The company is one of the fastest growing retailers, let alone cosmetics companies.
Companies like Dollar Tree, TJX, and other discounters are also growing fast. For example, Dollar Tree is expecting to open more than 600 stores in 2018. This discount growth could be attributed to continued thrifty mindsets following the recession, stagnant wages, etc. And consumers may increasingly enjoy a “treasure hunt” experience of finding the best deals.
According to the Direct Selling Association’s 2018 Growth & Outlook Survey, after reaching an all-time high in 2015, direct sales decreased 1.6 percent in 2016 and 1.8 percent in 2017 to $34.9 billion in the U.S.
The direct selling wellness sector is still the largest at $11.8 billion in retail sales, but it experienced its first decline in over 10 years. Wellness is followed by services, home & family care/home durables, personal care, clothing & accessories, and leisure & educational in order of size.
In terms of the salesforce, there were 18.6 million people involved in direct selling in the U.S. in 2017. The industry is down 9.3 percent from 2016. One driver of this decline is that companies moved people who were previously categorized as independent representatives away from their discount customer category and into the preferred customer programs. Another possible reason for salesforce decline is increased competition with the collaborative economy for independent contractors.
When done right, direct selling can combine the best of both worlds with brick and mortar and e-commerce, while leveraging its key strengths/differentiators: personal relationships and coaching, supporting a local businessperson, and providing a low-cost, low-risk way of starting a business.
“The best retailers are embracing what makes them special to counteract Amazon’s quest to dominate commerce.” – Fast Company
Direct selling tends to offer more premium products, making it much more of a challenge to compete on price. This is not inherently bad, as trying to compete on things like price can be a race to the bottom.
Katrina Lake, CEO of Stitch Fix, an online subscription and personal shopping service, says that part of the crisis that we’re seeing with retail right now is that if your retail store is merely a place for transaction where you tender cash and you take a product home, and that’s the only value that your store delivers, then you are in trouble. “I think part of the race to the bottom that we’re seeing is that if you’re in that business, then you are now in a global marketplace that’s all competing for cheapest and fastest.”
Warren Buffett echoes the same sentiment, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
Similarly, direct selling may struggle to compete with shipping. Retail giants like Amazon and Walmart are able to offer low cost/free shipping at a loss because they’re able to cross-subsidize with their more profitable parts of their business to prioritize growth and aggressive pricing at the expense of profit.
Many consumers and salespeople desire a comprehensive, cohesive approach with all of the channels complementing one another in an authentic way that improves the customer experience.
Although most direct selling companies aren’t well equipped to beat Amazon on shipping directly, they can certainly better compete by entering into strategic partnerships to improve shipping and logistics to better meet customer expectations.
It’s easy to think that Amazon offers free two-day shipping. However it’s actually not free. It’s only “free” if you’re a part of Prime Member, which requires a $119 yearly fee. Over 100 million people now have Prime, representing one of the most successful preferred customer programs in retail.
There’s a current industry trend toward creating preferred customer programs. Part of this is the result of resegmentation: companies re-categorizing people that signed up as direct sellers only for the discount on product purchasing for their own use to preferred customers. But, as we’ve seen a cascade of other companies following suit and resegmenting, they’re realizing enormous business value to this.
This transition naturally leads to an increased focus on customers. It allows direct selling companies to have much better data and insights into motivations and behavior of both customers and salespeople. As author Peter Drucker says, “What’s managed improves.”
Monica Wood, Global Consumer and Member Insights at Herbalife Nutrition (and DSA Industry Research Committee member), says they have always known that distributors and members join Herbalife Nutrition for a variety of reasons, including support, great-tasting science-backed products, or the business opportunity, both for part-time income or a full-time business opportunity. “Segmentation has allowed us to more clearly identify our distributors’ and members’ current goals, and to align our resources, communications and promotions more effectively to help them achieve them, and to better support them as their goals change over time,” she says.
Another company that’s seen added value and growth from segmentation is Isagenix. Jeff Kaufman, Director, Customer and Field Insights at Isagenix (and Industry Research Committee Chair), said that in 2017, Isagenix implemented its Customer First Program. “This program was created in part to help us better distinguish between members who simply want to purchase products and those who also wish to participate in the business opportunity,” he said. To do this, they encourage new members to join as customers first. Then those customers interested in the business opportunity may enroll as Associates when they are ready.
Following are some of the program’s benefits:
• Simplifying the enrollment and ordering process
• Eliminating the need to collect a customer’s Social Security number when first enrolling
• Making customer membership more attractive
• Providing the ability to direct relevant and unique communication to each segment
• Expanding and protecting the business opportunity
Unemployment is low, nearing full employment, but other metrics that measure the health of labor market, such as wage growth and people quitting their jobs, remain stagnant. The challenge is that with the emergence of the collaborative/gig economy, there are now more opportunities than ever for part-time, flexible contract work. For example, the Internet Association says that 23.9 million people are currently in the “online labor force” in the U.S.
Now is certainly an exciting time for retail with the need for evolution more important than ever.
Stay tuned for a series of Direct Selling News articles to further explore why direct selling is down and what it can do to recover. At the 2018 DSA Annual meeting last month we held a workshop to discuss initial thoughts from some company executives who attended. We want to continue the conversation and would love your input. Take the survey!
Why do you think direct selling’s U.S. numbers are down? Sound off by entering the following link in your phone, tablet, or computer browser to share your thoughts:
Question #1: In your opinion, what are the main reasons for the downturn in direct selling?
Question #2: What do we as an industry need to improve to compete in the marketplace
This article was originally posted on Direct Selling News and was written by Ben Gamse, the Market Research Manager at the Direct Selling Association.
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