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Sean O'Reilly: We're talking retail with a very special guest, on this consumer goods
edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool
headquarters in Alexandria, Virginia. It is Tuesday, March 15th, 2016. Joining me in studio
is the Brutus to my Caesar on this Ides of March, Mr. Vincent Shen. And joining us via
phone for interview week is our very special guest, Brian Dodge, Executive Vice President
of Communications and Strategic Initiatives at the Retail Industry Leaders Association.
Good morning, Brian! We can't thank you enough for joining us this morning.
Brian Dodge: Good morning, guys, and thanks for having me.
O'Reilly: So, Vince, I can't believe we actually pulled it together an interview at the last minute.
Vincent Shen: Not too bad in the last minute. But, I'm actually super excited about our
guest. Brian, thanks again for joining us on the show. We really think it's great that
your organization has a lot of relationships with companies that we talk about all the
time. We were looking at some of the members ...
O'Reilly: You have a large Rolodex, sir. (laughs) Shen: Exactly.
Dodge: (laughs) We're very proud of who we represent. Some great companies.
Shen: These are companies we cover very often during our show. So, it's really great to
get some of an inside perspective from you. But before we get there, could you give us
a brief description of what the Retail Industry Leaders Association is about, what you do there?
Dodge: Sure. So, as we've sort of alluded to already, we represent the largest retailers
operating in the U.S. And like many trade associations based in D.C., we have a heavy
focus on advocacy. But we also bring the industry together, the executives from the industry,
to talk about the operational issues that they're facing, whether it's in the supply
chain, or asset protection, finance, tax, and so forth, and bring those executives together
to identify best practices, trends, and ways where a collaborative solution may advance
the industry more broadly. So, we're really excited about the 80 or so retailers that
we work with, all of which are over $1 billion in annual sales, most of which are public
companies. And it's a dynamic industry, it's a lot of fun observing these companies as
they evolve and adapt to economic challenges, changes in demographics, all the things that
I think your listeners are also keeping track of.
Shen: Sure thing. So, based on that, you mention a lot of trends and best practices among the
retailers. Recently, this earnings season is winding down. We've heard a lot of the
results coming from retailers reporting the fourth quarter, which of course encompasses
the very important holiday shopping season. So, what are some major takeaways that some
of your member companies have had with overall spending, consumer habits, the different platforms
that shoppers are using to interact with these companies? Any comments you have there
would be great.
Dodge: Yeah, sure. So, I think it's important to look first at the macro-level. You can
twist the data anyway you'd like to, but I think what you'll find on a macro-level is
that consumer spending is largely flat to modestly growing over time. So, for retailers,
that is a complicated scenario in which to operate. There isn't robust growth to buttress
financial gains for individual companies. So, it turns back on really effective and
efficient execution in order to gain share from a very slow-growing economy.
So, I think retailers are recognizing the environment in which they're operating, and
focusing on the things they can control. How do they make sure those very simple maxims
are achieved, which is, have the right product in the right place, at the right time, at
the right price? It sounds simple. Obviously, it's very complicated. But, I think that's
how retailers are looking at is. "How can we improve our execution so that our customers
stay our customers, and others are attracted to our stores or our online or mobile platforms
in order to find the products they're looking for?" That's really the focus. It's simple
in statement but very complicated in execution.
Shen: Okay. And, it's funny you mention that, because, I think it was last week or two weeks
ago, we were talking about the movie theater industry, actually thinking about AMC, Carmike,
and how they're facing something sort of similar, where ticket sales set a record in 2015 in
terms of dollar value, but actual ticket volume is stagnant. So, we see how, like you mentioned,
consumer spending, flat or low growth. But, I guess, one of the brighter points there
that a lot of companies allude to is how online shopping, ecommerce is growing at potentially
even 10 times the rate of consumer spending overall during the fourth quarter. So, how
are companies thinking about that? We have some, obviously, more traditional retailers,
brick and mortar operations, moving, trying to get better in terms of their omni-channel
strategy. What else are you seeing there? What kind of innovation are companies adopting
in that space to better compete against these pure-play online retailers?
Dodge: Sure. I think it's important, first, to break out the fact that, certainly, pure-play
online retailers are doing very well. But, I think the .coms for some of the traditional,
referred to as "brick and mortar" retailers, are also doing well. And the investment that
retailers have made in their .com, but probably more broadly in their omni-channel, is starting
to pay off. There's no doubt that the growth -- we all carry a high-powered computer in
our pockets. Our ability to access retail items for purchase is ubiquitous. We can do
it at any time, in any place.
For our members, I think we recognize that having stores is a competitive advantage.
People like to be able to see and touch products before they purchase them. The challenge is
making sure that once they've done that in a store that they actually make the purchase
there. And if they choose to take that information and go home and search online for a better
price, that they find an equal, competitive price on the traditional retailer's .com.
That's difficult. Stores are expensive, there are more employees in a traditional retail
environment. So retailers kind of grapple with that, to figure out how they can reduce
costs elsewhere so they can make sure those prices are competitive once they get online.
The challenge of omni is the great Rubik's cube of today. How do we figure out -- you
have to manage, effectively, three if not more platforms to make the same sale. That
obviously adds cost. But how do you do it in an efficient manner so that the whole experience
for the consumer is a great one? And I think some are making strong advancements because
the omni-channel environment offers great cross-marketing opportunities that the pure-play
online folks wouldn't otherwise have.
So, I think it's part of a long evolution. These terms like omni-channel have a tendency
to pop into the retail vocabulary with the expectation that they'll fade out over time
as it becomes sort of standard operating procedure. I think we're going to be talking about omni-channel
for a while, because we're a long way from perfecting it. But I think, once we do, you're
going to see the consumer experience will blossom. And hopefully, when we get to that
point, we'll see more (laughs) robust growth in consumer spending so that retailers themselves
can take advantage of that.
O'Reilly: So, what do you expect to see over the next few years as retail evolves? Is the
omni-channel strategy just getting started? Or do you think it's going to be more slow
and gradual and, you're talking about 10-20 years, they'll actually have perfected getting
consumers to buy in-store, whether it's on the phone or at the cashier?
Dodge: Yeah. If this was a football game, I don't think we'd be at the end of the first
quarter yet. I think we've got an awful long way to go. In terms of just the underlying
technologies, there's lots of innovation that needs to happen. We also have a regulatory
space that is largely undefined as it relates to a lot of this stuff. So--
O'Reilly: Is that that big of a deal?
Dodge: I think it is, especially when you get to some of the uses of analytics and store
tracking, things of those sorts, where businesses are just not yet sure how they can implement
them, knowing the great potential that they have, because of regulatory ambiguity. The
loudest voices are ones who are raising concerns. So, there's a lot of education that has to
happen in that space in order to give businesses the comfort that they need in order to utilize
some of these things.
So, yeah, we're very early on in this process, and I think we should all expect that it's
going to take some time for it to be worked out. But, for consumers, there's enormous
opportunity. The whole lifeblood of retail is adapting to the demands of the consumers.
So, as consumers are more vocal and demonstrative in the way that they want to shop, and want
businesses to interact with them, you're going to see retailers responding to that. And it's
a really exciting time.
And we can’t be lost in this. There's a lot of focus on Millennials entering their
prime consumption age. There's another generation right behind them that is maybe not as large
in size but equally as powerful to dictate the patterns of retailers and businesses in
general for years to come. It's an exciting time.
O'Reilly: Those darn kids have no idea what I went through on AOL in 1998.
Dodge: (laughs) That's right.
O'Reilly: They do not appreciate downloading a song in eight minutes. Taking a step back
to what you said just before that, does this lend itself to, you know the age-old tale
of how Borders was basically just a show room for Amazon.com and books and everything, and
that obviously didn't go so well for them. Does that lend itself to a future of retail
where, I don't want to say there's more haggling going on, but, I can go into a store, at Macy's
or any department store and be like, "Hey, listen, a very similar Oxford shirt is on
Amazon or something else for $10 cheaper. What are we going to do here?" Is there anything
else that can be done by retailers?
Dodge: I think the days of the showroom, that was a really popular term a few years ago,
I think you're seeing less of that because retailers have a much better sense of what
the price competition is, but probably more specifically, what kind of price competition
do their customers are able to access instantly. So, the pricing is becoming, I think, more consistent.
O'Reilly: Mm-hmm. But, inventories are coming down, and they're just having giant distribution
centers or something.
Dodge: Well, yeah. That's going back to the omni-channel. So, the advantage for some of
the large pure-play online folks is their ability to deliver products as quickly as
possible, same-day, next-day. That's one of the more attractive things they offer as the
price that's sort of the delta between traditional retail prices and pure-play online prices
evaporates. In that space, retailers have a great advantage that they can take advantage
of, but are struggling to figure out exactly how to do so, which is, if you have a distribution
model that recognizes that your stores can be fulfillment centers, then your ability
to deliver same-day, next-day is really high.
And so, part of one of the many omni-channel challenges that they're facing is, how do
they do that? How do they figure out how to apportion space within a store to distribute
product and accept returns? And how do they figure out exactly which ones should be responsible
for fulfillment in an area, and which ones should be exclusively for the merchandise
that's on sale there for consumers coming into the store? So, I think there's a really,
really great opportunity there for the brick and mortar retailers.
The one thing I think I should carefully say here when it comes to stores is, I think stores
are an advantage. I think we're seeing more and more chatter acknowledging that. But there
is a degree to which having too many stores, or stores in the wrong locations, is a drag.
So, you're seeing a lot of retailers making changes there in order to make sure that a
store that maybe was in the right place 20 years ago isn't there simply because of inertia,
and that they're placing their stores in the right places.
Shen: Okay. You touch on some points there that we have seen personally, not only in
some of our content from our writers on Fool.com, but that we talked about here, in terms of
some people saying that a Walmart or a Target with so many actual physical locations can
turn that into an advantage, like you said, in terms of becoming its own distribution
center. And then, we've also talked about how, Best Buy for example, is trying to innovate
in getting away from showrooming by improving their customer service, the knowledge that
their sales staff have on the ground floor, and creating some of these store-within-a-store
concepts to attract customers and build up foot traffic. Are there any other innovations
or strategies that you've seen companies take? Are there any startups, or VCs, even, pushing
certain ideas that you think might be a big change 5, 10 years down the line, even in
terms of payments or anything like that?
Dodge: You mentioned payments. There's a whole world Innovation going on in payments that's
pretty exciting to see. I think retailers are largely in the driver's seat, because
the ubiquity of acceptance is a key driver to what mobile platforms will be successful.
So, that's a really exciting space. If I were a betting man, I still wouldn't place a bet
on this one, because it's still too difficult to get a read of.
In terms of retailers making innovations, I think we've seen a spike in the last couple
of years of retailers starting their own innovation labs or accelerators. And while I think some
of the things that have spun out of them so far are a little far-fetched or hard to get
your head around, I think there's great opportunity in them. And I think it's exciting that retailers
are making that individual capital expenditure to have innovation going on within their company.
We just had, at RILA, we host an annual meeting of the CEOs of our member companies, which
we had in January. It's a two-day agenda. And the agenda was overwhelmingly dominated
by the topic of innovation. Our CEOs help us set that agenda, so it's something that
they were thinking about a lot. So, it's innovation related to how they conduct their operations.
It's supply chain innovation, it's product innovation. There's no, I don't think, limit
right now to where retailers' minds are in terms of ways that they can improve their
execution. Going back to the point I made earlier, as growth is flat, the importance
of execution couldn't be higher.
So, specific examples, you named the store-within-a-store, that's clearly becoming a popular model.
I don't know if I have any others to point to right now, but I would say stay tuned. Maybe
within a year or two, we're going to see some new examples roll out that'll be really interesting.
Shen: Awesome! So, wrapping up here, we had two more topics that we wanted to touch on.
The first one, actually, Sean, if you wanted to ... ?
O'Reilly: Yeah. So, on a recent show, we talked about, I thought it was a big announcement,
Whole Foods is teaming up with SolarCity. And, obviously, these two firms are in with
the conscious capitalism movement and all that. Basically, the team-up was, SolarCity
is installing solar panels on 100 Whole Foods stores. As I understand it, Retail Industry
Leaders Association, you guys have got a robust sustainability program aimed at helping companies
reduce their energy consumption and all that stuff. Is this the first pitch of a big game
where retailers are going to start going in this direction?
Dodge: I think our members have recognized for a long time -- and I've been doing this
for about nine years, so, in my nine years here, I think I can comfortably say that our
members view sustainability as good business. Sustainability generally has multiple effects.
One is reducing costs, which is very good for the business, very good for its customers
and investors as well. But, it has a socially conscious and positive impact on the environment
as well. So, we've led a program now for seven years to help the industry share practices
and identify ways where they can accelerate their incorporation of sustainability within
their retail operations.
One of the things that I'm most excited about right now is a program we have around energy
management. Your reference to the Whole Foods and SolarCity example is a perfect segue to
that. I think retailers, our members have identified that there's about $20 billion
spent every year by retailers on energy costs. Big number.
Dodge: Within that, there's an estimated $3 billion of, we'll call it low-hanging fruit,
savings that could be accessed relatively easily through solar panel investment, solar
panel things of that sort. So, the program that we've put together is to help our members
tap into that savings by better understanding the expectation of CFOs when they're making
a pitch internally. Working with, not all of our members own all of their property,
they lease, so, working with the owners of the property to work on common solutions that
could reduce their energy investment. Then, identifying ways to incorporate renewable
energy at every turn.
So, we're excited about that. The U.S. Department of Energy recently recognized the program
as exceptional and awarded us $750,000 to expand the reach of the program. We're really
excited about what we can accomplish over the next couple years with it.
Shen: Awesome! This last question, I think, because it's outside of Sean and I's expertise,
it's not something we touch on as often during our usual episodes of Industry Focus, is around
the legal and regulatory framework. Are there any issues around, even, cyber security? We
had the tie-up at the West Coast ports last year that impacted a lot of retailers in terms
of their inventory levels and things like that. Are there any things in that regulatory-legal
framework that are coming up that retailers are focusing on that investors might want to know?
Dodge: Yeah, I'll try to mention two really quickly. The first is trade. The Trans-Pacific
Partnership is getting a lot of news coverage right now. It is an enormous opportunity for
businesses in the U.S., both importers and exporters. The Peterson Institute estimates
that the T.P.P. could increase consumer income by reducing cost by $131 billion. For retail
specifically, the reduction in the duties on apparel would net a $932 million in duty
savings in year one of the T.P.P. So, we're in a political environment, presidential election
year, there's lots of comments being made about the harmful effects of trade, but the
benefits of trade are enormous. Investors, consumers, and businesses should all care
about this and should be pushing that the T.P.P be signed as soon as possible.
The other important thing, and it ties up to the T.P.P. and the movement of goods is
the importance of resolving enormous congestion problems in America's ports. It's not a particularly
sexy issue that get a lot of attention, but we have choke points at our access points
in America, and that's a problem for everybody. It increases costs, it limits the effectiveness
of businesses who are trying to export their goods globally. Until we get our arms wrapped
around the labor issues at ports, operational and infrastructure issues, we're going to
be at a disadvantage to the rest of the world. And so, we've got some key ports around the
country, we need to figure out how to get them more efficient, get them a more modern
infrastructure, and get the goods flowing more smoothly. So, key step in solving that
problem is raising awareness, and I appreciate you giving me the opportunity to do just that.
O'Reilly: You bet, Mr. Dodge. We cannot thank you enough for your time. I can't wait to
have you on again. Dodge: Great!
O'Reilly: That is it for us, have a great day!
Dodge: Terrific, thank you so much.
O'Reilly: If you're a loyal listener and have questions or comments, we would love to hear
from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always,
people on this program may have interest in the stocks they talk about, and The Motley
Fool may have formal recommendations for or against those stocks, so don't buy or sell
anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly.
Thanks for listening and Fool on!