By David Gens
Almost ten years ago a tuxedo retailer with years of history and multiple franchises, began to struggle.
The tuxedo shop was a client during Merchant’s early days when we were small enough that I was able to personally oversee the underwriting of many loan applications. Until that point, this business had a healthy portfolio of open and repaid loans. All indicators showed that while they were struggling a little, they were still a thriving small business. But, going over their financial statements I noticed that they seemed to have gone into freefall. They were bleeding money. Every loan they took out was bigger than the last.
Curious, and because defaulting on their loans would have put our then-tiny operation at risk, I called the owner. The lessons I learned from working with this tuxedo shop so many years ago become ever more relevant as brick and mortar businesses face increasingly fierce competition from e-commerce.
I met the owners, and got a tour of their facilities to get a better understanding of where they stood. We met several times to discuss their business case and recent financials.
It turned out that they had decided to expand in an effort to grow, by converting walk-ins into repeat customers. In a span of about six months, they opened various new franchise locations. Some of these were in remote mall locations with low foot traffic, resulting in the closure of some locations. They were doing what they thought would create the most impact and get them out of their financial slump.
At the same time, this retailer was competing not only with Amazon’s product offerings, but the rapid expansion of direct-to-consumer brands like Indochino that were marketing aggressively online, had lower overhead and costs, and a more bespoke offering.
The brand was also thinking about how to corner the online market because it seemed like the thing to do. My advice to them: Don’t go the e-commerce path just because you think you should, given it’s a completely different kind of company, requiring a unique business model and approach.
Even my industry, which focuses on online loans, is facing competition from Amazon through its small-business lending vertical. Although we would be considered an e-commerce offering, most days I feel more like the family-owned tuxedo shop, and less like a mini-Amazon lender.
Amazon is automating the act of buying as much as possible, but they can’t automate differentiation, specialization and the human touch, let alone do it at scale. Let the Amazons of the world race to the bottom of the price barrel on staple goods and mass-market items, and accept the fact that as a small business, the best bet is to compete on being different, not on being the same.
What this tuxedo company already understood is that people are wired to touch, inspect and compare a product before deciding it is right for them, and this was something that couldn’t translate to an online shopping experience. Shuttering their unprofitable stores freed up their capacity to innovate and focus on their growing database of loyal clients. The owners decided to focus their tuxedo rental business on providing exceptional service in order to give their existing customers a great reason to refer their business to friends and family.
With Amazon’s recent acquisition of Whole Foods, we’ve revived a conversation that has taken many forms in the past: can bricks and mortar survive in the age of e-commerce? The short answer is yes. Looking beyond my tuxedo case, you can look at well-curated bookstores and other models where we are seeing a mom and pop renaissance. These are inevitably occurring in niches where the Amazons of the world are finding it difficult to replicate the human touch and service model. When the customer’s shopping habits change there’s still an opportunity to appeal to their tastes and desires.
The challenge that brick and mortar retailers face today is the exciting process of redefining the foot traffic model. A big part of this is selling products that people enjoy shopping for.
The new tuxedo consumer wants trendier styles (thanks to the likes of Drake and Romeo Beckham), and expects them delivered to their door and to fit perfectly on the first try. Sending in your own measurements to a company leaves a lot of room for error — an issue online retailers have tackled by providing the option of having someone come to you to get your measurements and create a bespoke fit. With tuxedo retailers though, the person who measures you is the same person who takes in your clothes, creating a much more personalized experience. That added level of personalized customer care is what makes a trip to the tailor worth it. This way, the bricks and mortar owner has an advantage and can be confident in their own value proposition. In fact, there’s the opportunity to translate this value to a story that’s meaningful to your existing and future customers.
Bricks and mortar businesses have never had it easy, and moving forward, this won’t change. Let’s be clear about the tradeoff. Many will inevitably no longer be able to sell mundane commodity products – things that don’t excite or delight and can be easily replaced by the all-too-familiar brown boxes that come through the mail.
Consumers turning to ecommerce may be one of the biggest and enduring business trends this last decade, but so is another more subtle trend that has big implications for the future of bricks and mortar: walkable urbanism. We are in the middle of a generation that is flocking in droves to the cities in search of opportunity and connectivity. Every town center aspires to be more walkable, ultimately resulting in more foot traffic for storefronts. The onus is on the business owner to provide an experience that gets foot traffic through the door, and keeps the consumer coming back. Besides, a well-run businesses never goes out of style.
David Gens is the CEO and Founder of Merchant Advance Capital. @advancecapital.