How market darlings lost the digital battle and what brands can learn from it
Bed, Bath and Beyond in the US seems to be one of the latest causalities headed for bankruptcy, following a string of mishaps and failed transformation endeavours. They are not the first and certainly will not be the last, as digital disruption accelerates and customer expectations continue to evolve.
According to Innosight, the average tenure of S&P 500 companies will shrink to 15-20 years this decade, half of the tenure in the 1970s – which demonstrates that no brand, no matter how big or loved is immune. Adapting to changing market conditions is not a once off transformation exercise, it requires organisations to continuously evolve and adapt as the market changes around them.
In this article we take a closer look at the demise of 3 brands that were the envy of many, only to fall and struggle in the digital age and some of the learnings for those faced with similar challenges.
The changing face of the beauty industry and the demise of Revlon
When Revlon filed for bankruptcy in June, many industry pundits pointed to Revlon’s inability to compete with newer brands that advertise heavily on social media. Whilst social represented the dawn of a new era for beauty industry brands, it was the tip of the iceberg in the demise of Revlon.
Changing dynamics of the beauty market
Digital adoption in the beauty industry like many other categories has changed the face of beauty retailing as we know it. For Revlon, a failure to recognise changing market dynamics was one of many failures by management.
Whilst some of the world’s biggest celebrities had once been the face of brands like Revlon. Celebrities themselves became key competitors to Revlon enabled by digital. In the digital age, celebrities like Kylie Jenner, Rhianna and others have been able to amass large digital audiences and monetise the power of their brands through their direct relationship with the end consumer.
But it is not just social and celebrities that characterise the changing market. Like we’ve seen in many categories the shift to buy beauty products online has been demonstrable – accelerating during the COVID period.
In 2022, US cosmetics and beauty retail eCommerce sales will be more than double those of 2019 ($18.60 billion versus $9.21 billion) and by 2026, eCommerce sales will account for nearly a third of the category’s total retail sales and influence a great deal more.
Like many CPG brands, adapting a business model to serve online platforms and retailers is slow and painful. And all the while, brands like Revlon have to do so quickly as nimble start up brands selling DTC are on the up and up in the beauty industry. By 2019, according to data from eMarketer, over 50% of beauty consumers had purchased DTC in the past and a sizeable portion were also intending to buy DTC in the future. What this data shows us is the way consumers were procuring beauty products and from whom was demonstrably shifting. Add to the mix changing consumer tastes when it comes to natural cosmetics, and it is easy to see why brands like Revlon were in strife.
The rise and fall of Toys R Us
Toys R Us roots date back to 1948 when it opened its first baby furniture store. Like Revlon however the digital tide proved too much for the once successful retailer. Like so many retailers, Toys R Us was so wedded to its Bricks and Mortar operations that it failed to adapt its business model for a changing market.
For Toys R Us a number of factors contributed to its demise but, changing consumer behaviour bought about by digital was once again centre stage playing a leading role and Toys R Us failed to innovate in the face of change. In the year Toys R Us declared bankruptcy (2017), Amazon was pulling in an estimated $4.5 billion in US toy sales and that was an increase of 12% vs 2016. That same year toy sales overall in the industry were largely flat seeing just 3% growth. When consumers started embracing eCommerce in the early 2000s, Toys R Us decided that online retailing was not part of its core business. To solve for the “online problem” it turned to Amazon which effectively handed its customer base over to its competitor. Announcing a 10-year partnership with Amazon in 2000, for which Amazon was paid handsomely for, customers who visited ToysRUs.com were redirected to Amazon. Once Amazon saw how well it worked, it began expanding its toy and baby categories and other merchants began selling those products on Amazon. Toys R Us ultimately sued Amazon and won, allowing the chain to terminate the deal. But it lost years of momentum in developing its own online presence and eCommerce strategy. At the same time, Toys R Us were locked into a battle for kids' attention and increasingly kids were turning to online video games for entertainment, and you did not need to go to Toys R Us for those.
Not even those at the top end of town are immune – the decline of Neiman Marcus
When Neiman Marcus filed for Chapter 11 bankruptcy in 2020, it was yet another retailer casualty of the pandemic. But the demise of Neiman Marcus wasn’t caused by the pandemic itself, laden with debt it was simply the final nail in the coffin. The 116-year-old retailers' fall from grace was again in part impacted by a shift in consumer behavior and preferences. In 2017, 44% of luxury sales growth was derived from eCommerce. Whilst Neiman Marcus was adopting eCommerce, the level of competition in luxury eCommerce was fierce with Net A Porter and Farfetch on the scene. But that wasn’t the only shift in behaviour Neiman Marcus was contending with. Luxury rental clothing subscriptions were on the rise with millennials 3x more likely to use a rental service for clothes than non-millennials. At the same time the luxury goods second-hand market had already neared 30% in the US by 2019, leading every other major market. In 2019, Neiman Marcus invested in Fashionphile a re-sale platform for luxury goods, but it was too little too late – the following year it filed for bankruptcy.
Ironically since re-structuring post-bankruptcy, Farfetch has invested A$266 million in Neiman Marcus Group (NMG), in an attempt to increase its share of the A$100 billion US luxury goods market. The major “global strategic partnership and investment” by Farfetch was also designed to accelerate NMG’s “growth and innovation through investments in technology and digital capabilities.”
What we can learn from the mistakes of those who failed to adapt.
Three brand icons, market darlings all of which had survived decades before their collapse. So, what is it that we can learn from these and many others who have fallen in the digital age?
It can be said that usually the biggest threat to organisations is not competitors, but it is themselves and this holds true for all of these organisations and others who have fallen before them. In each of these 3 cases, management failed to effectively grasp the change occurring in the market, failed to adopt and embrace new business models and act appropriately to future proof the business. When most of them did it was too late.
It is often the case that organisations founded before the digital age hold onto the belief that "what once made them successful will continue to do so". These tightly held beliefs lead organisations to double down on what they see as their core business and change only comes once sales are in perpetual decline and then it is too late.
In all three instances, eCommerce and digital was not seen to be core business. Toys R Us outsourced their presence to their biggest competitor, whilst Neiman Marcus had a separate division overseeing its catalogue and eCommerce sales even though it was the same customer. In the case of Revlon it missed the fundamental market shift to DTC models. For traditional bricks and mortar retailers, their physical presence is a major competitive advantage and elevates their eCommerce offering and vis-a-versa but too often these operations are structured to compete, or eCommerce is set up and funded based on today’s sales levels not based on the size of the longer-term opportunity.
For brands to thrive and drive growth in the digital age they must;
· Continuously evaluate their business model in-light of changing consumer behaviour
· Invest in digital and eCommerce based on the size of the future opportunity not based solely on the
revenue attributed to the channel today
· Embed mechanisms to identify key trends and shifts in behaviour early and be able to experiment
and test to build capability for the future
· Ensure that internal culture does not reject change as a protection mechanism to maintain a
perceived reality of future performance.
We at Arktic Fox are proud to be partnering with an array of organisations on digital transformation and eCommerce adoption. If you want to find out how we can help your organisation understand the changing landscape and build strategic clarity get in touch.