What's In Store

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A convergence of price, product and point of sale, radically remodeling retailing today, has far-reaching implications in store for marketers, ad agencies and ultimately the media companies serving them.

From Wal-Mart's TV blitz featuring fresh food, once the purview of the grocery store, to the sinking sales of The Gap and its fellow mall dwellers, to the bankruptcy of discounter Kmart Corp., the new retail convergence is breaking the rules that governed retail for most of the past century.

"There are going to be fewer stores and fewer retailers and fewer doors for suppliers to sell through," said Walter Loeb, publisher, Loeb Retail Letter.

Retail convergence is the coming together of shoppers, goods and prices. Customers of all income levels are shopping at the same stores, often for the same goods. Old distinctions such as discount store, specialty store and department store lose significance: The successful store must match a host of rivals on selection, service and price.


For agencies, retail convergence means fewer clients-and clients with increasingly difficult challenges. For product marketers, it means even more erosion of clout to the merchant. For media, it could mean less ad revenue because there will be fewer retailers and those with momentum are less reliant on advertising. For retailers, the advantage goes to players with the best execution and lowest cost structure.

Retail convergence, on a broad scale, is manifested in the demise of Montgomery Ward and other chains and consolidation of Target Corp.'s Dayton's and Hudson's into Marshall Field's. It's a trend Arthur Martinez, former Sears, Roebuck & Co. chairman and now Chicago Federal Reserve Bank chairman, has predicted will result in America, like Europe, winding up with only a handful of major chains.

The American consumer's roadmap for where products can be found has shifted from a segmented approach to a consolidation that is almost a throwback to the 1800's, when a general store was the place to shop for everything from coffee to a coffee pot.

In the 1900's, shoppers migrated from the Sears catalog to the department store, and then to the shopping mall and specialty stores. A few years ago, the coffee pot customer may have gone to Williams-Sonoma or even Starbucks. Today, it could be Target Corp.'s Target or Wal-Mart Stores' Wal-Mart.

"Where you go for what you want-that has created the biggest challenge facing [retail] advertisers" and merchandise suppliers, said Ellis Verdi, president of ad agency DeVito/Verdi, New York.

At the same time, while retailers have long pursued a strategy of offering consumers good, better and best products, there are indications consumers have settled on the notion of good enough. Gap Inc.'s Old Navy, Gap and Banana Republic brands formula is struggling against department store sale prices, knock-offs at Target and new concepts such as Sweden's Hennes & Mauritz. H&M is building a following in the U.S. with its "almost disposable" fashionable apparel.

Fashion, once the exclusive of the haute couture, now moves just as quickly from the runways of New York and Paris to retailers of all genres. Designers have become "demystified," said George Fertitta, president and founder ad agency Margeotes/Fertitta & Partners, New York. Ralph Lauren sells in department stores and in the Marshall's at the strip mall. Stephen Sprouse, fresh off a limited edition of Louis Vuitton handbags and luggage, has designed a summer line of clothing and other products for Target.

taking on the mall

Retail convergence is hitting the mall head on. "The mall is shifting away from specialty store and department stores," said consultant Mr. Loeb. He said malls are looking for anchors such as Target, a daunting prospect for specialty retailers. "The umbrella mall for upscale stores is gone," he said. "The weakness of the Gap has hurt." Gap's comparable sales-sales at stores open at least a year-have fallen for 21 consecutive months.

Department stores are in a tough spot: They have roughly the same goods as other outlets yet have a higher cost structure. "Why go to department stores and play cat and mouse waiting for double-digit discounts?"asked Burt Flickinger, a marketing consultant. "Why not just go to Marshall's or T.J. Maxx?"

Convergence has led to a turning point in retailing, said Mr. Verdi, a director of the National Retail Federation's Retail Advertising and Marketing Association.

Price no longer is the marketing elixir. "The `wow' of the price message doesn't exist," said Mr. Verdi, because consumers now expect low price as a given. Even "off-pricers can't talk about price anymore; it's irrelevant," he said.

At the same time, the already over-stored American retail scene has reached a saturation point, Mr. Verdi said. The malling of America is clear: There was 20 square feet of shopping center space per capita last year, up 36% from 1986, according to National Research Bureau, publisher of the Shopping Center Directory; that marked a tiny drop from the 2000 peak of 20.26. For retailers, the question has become "how to win share, not just how do you open a store," he said.

Private-label products are pushing the trend toward convergence as Target and other retailers use design and fashion to upgrade house offerings vs. national brands. Albertson's, the nation's No. 3 grocery and drug retailer, is focusing on private label to boost sales, putting a fancy food look on its private-label flour with soft colors and messages in flowing script to appear, but not actually be, more expensive than the traditional General Mills' Gold Medal brand. Generic packaging was the rage in private label during the early `80s downturn for consumers who wanted to save money, but not this time around.

"If your private label brand is the discount brand, it lowers the store image," said Paula Ausick, senior VP-director of brand equities at Interpublic's Foote, Cone & Belding Worldwide, Chicago.

private dancing

Retailers are beginning to converge in offering private label products for more and more lines, once the domain of branded manufacturers.

Last year, Wal-Mart rocked vitamin makers with its private label line, Mr. Flickinger said. This year, toothpaste is Wal-Mart's target. "Wal-Mart is moving into areas once considered sacrosanct," he said.

Of $315 billion in U.S. food and drink sales in 1999, $48 billion-15.4%-was private label, according to New York marketing research firm Datamonitor. That's up from $39 billion in 1995, and it's expected to grow to $67 billion-18%-by 2004. Private label is one more way power retailers are calling the shots, with clout in the marketplace shifting from supplier to retailer.

To keep Wall Street happy with earnings and comparable-store sales increases, retailers continue to expand product offerings, often via increased merchandise selections, further triggering convergence at the point of sale.

At back-to-school time, Wal-Mart competes head on with Office Depot, Staples and Office Max. At Christmas, it out-toys Toys `R' Us.

Year round, Wal-Mart has emerged as a major player in the grocery aisles, pushing fresh produce along with its traditional offering of diapers and laundry detergent. A current ad blitz created by Bernstein-Rein, Kansas City, Mo., shows happy moms walking amid colorful selections of vegetables, laughing with friends and discussing how much fun it is to spend time at the store.

Big chains are relying more on the costly, but effective, weekly freestanding newspaper insert or circulars. "Circulars over the last 20 years have become the drug of choice for retailers," said Mr. Verdi.

Convergence, however, will mean more than a decline in ad dollars for expensive TV shoots. Convergence proffers the specter of declining revenue for both agencies and media companies. Wal-Mart brought in $215 in sales for every dollar spent on advertising in 1990; that grew to $320 in 2000, according to Advertising Age. Put another way, Wal-Mart's ad spending in 2000 was $498 million, a bit below Kmart's $542 million-but Wal-Mart generated more than five times the sales.

the cross-sell

Wal-Mart's sales-to-advertising ratio is skewed a bit by sales it gets from Sam's Club, a warehouse chain that does little advertising; Sam's last year accounted for 13% of sales. But beyond that, Wal-Mart has developed a clearly defined image built around everyday low prices. It's able to grow its business by selling more goods, in more categories, to customers who now are in the habit of shopping at Wal-Mart. Since it has the store traffic and a vast store in which to cross-sell its audience, Wal-Mart is less reliant on advertising to deliver its message.

Wal-Mart, a destination retailer, isn't alone in becoming less reliant on advertising. Amazon.com, the ultimate destination e-tailer, dropped TV advertising to cut expenses-helping it report its first-ever net profit over the holidays.

The dot-com bust significantly reduced the number of cyber shops, with Pets.com, grocery store Webvan and others gone. But e-commerce is booming; online retail sales jumped 13.1% to $10 billion in the fourth quarter, accounting for 1.2% of U.S. retail sales, the Commerce Department reported last week.

Some industry watchers bet the big portals-AOL Time Warner's America Online, Microsoft Corp.'s MSN, Yahoo! and even Amazon.com-will align with more major retailers. "We have seen the first of deals," said one industry insider, who doubts agreements between a retailer and a portal will be exclusive in the long term because that will prove too limiting for both sides.

Already, Target and Toys `R' Us have aligned with Amazon.com, giving the site a chance to cross-sell customers-one more sign of retail convergence.

In the converging world of retail, it is possible for a consumer to get most needs met at one store. But convergence itself is proving somewhat elusive even for its poster boys, such as Target. Mr. Flickinger noted on a recent tour of stores, he found Target was "struggling on the food side of the house" vs. Wal-Mart as well as local best-of-class regional chains. Target at press time had not returned calls.

"As good a job Target does in the health and beauty category, Target appears to be missing by a comparable amount on the consumables side," he said, adding that if Target's deli or fresh-fish counter doesn't increase customer visits, there won't be the intended cross-over benefit for other departments.

Even though they may occasionally stumble, Target and Wal-Mart have the image, the goods and the merchandising skills to execute retail convergence. The onus is on other retailers as well as each and every marketer putting merchandise on a retail shelf.

Said marketing consultant Mr. Flickinger: "A tectonic shift in the industry is underway."

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