In an unusual turn of events, the sands are shifting under Whole Foods Markets—and now it’s in trouble.

In short order, Whole Foods, the quintessential upmarket food retailer, has gone from being a Wall Street darling to a Wall Street pariah. In rough terms, Whole Foods’ equity value has dropped by nearly half since winter. Even more disturbing, its comps in the first quarter were a meager 1.3 percent, or less than half of what they generally are. The last weeks of the second quarter saw comps at 0.4 percent. This indicates very serious sales slippage and suggests comps are headed for negative territory.

What’s Going On Here?

Whole Foods is now facing three major challenges, two of which have to do with price and one of which concerns its core product offer.

1. The newest challenge to Whole Foods is one of its own making. In New York City, the Department of Consumer Affairs found a “systematic” problem with short weights, meaning consumers were paying more for product than they should. News stories about that situation spread far and wide, and are what account for most of the near-term drop in comps.
2. The longer-term drop in comps has to do with the persistent consumer perception that Whole Foods product simply costs too much, even if it’s high quality, natural and organic. This remains the case even though Whole Foods has made some real progress in lowering many price points, a fact that remains invisible to many consumers.
3. In another pricing challenge, natural and organic product has gone almost entirely mainstream and is widely available at many supermarkets for far less. As I predicted earlier in The Robin Report, Whole Foods is relinquishing the product exclusivity it has long used to convince consumers to shop its stores and pay its prices. Whole Foods has since acknowledged that it was slow to recognize changing competitive dynamics.

Curious Reactions

Some of Whole Foods’ reactions to these challenges have been strangely ham handed. Whole Foods has had a longstanding problem with short weights—In 2012, the company paid a $800,000 fine in California because of short weights. It has paid fines in other jurisdictions too.

In New York, inspectors said Whole Foods’ pricing errors were the most serious they had ever encountered. In response, John Mackey, co-CEO, said Whole Foods was a “victim” of overzealous enforcement because all food stores have pricing inaccuracies and they often fall in customers’ favor. He also pointed out that Whole Foods has a high percentage of random-weight items wrapped and weighed in store, which are more prone to error.

From the consumer point of view, this is cold comfort. Pricing integrity is one of the most important tasks retailers have. It simply must be done right.

Nonetheless, Whole Foods offered to give customers product for free if they noticed they were overcharged. For packaged food, that’s a step in the right direction. For random-weight product, it’s an empty offer. How many consumers have scales accurate enough to measure product weight and tare weight to determine what the price should be?

Even as the offer applies to packaged goods, it’s a strange one because it doesn’t include product that is mis-charged in customers’ favor. That means Whole Foods stores will tend to be full of underpriced product.

As for Whole Foods core product offer —natural and organic—it seems clear that it is losing its footing. Many other supermarkets sell more product in that category than Whole Foods does. Costco is now the nation’s largest purveyor of organic product. Kroger’s private label line of organic product is doing quite well. And so it goes with nearly every other major food retailer.

Of course, the fact that many players now offer natural and organic product at lower prices hammers home the idea that Whole Foods is overpriced. But there’s more: One bizarre price-related episode in California made Whole Foods an Instagram laughingstock. Whole Foods offered “asparagus water,” which consisted of a bottle of water containing three asparagus stalks. It was priced at $5.99. Whole Foods withdrew that absurd product. When customers laugh at you, it’s not good news.

The High-Price Solution?

So what is Whole Foods doing about that high-price image? In a move that looks very much like capitulation, Whole Foods intends to open something of an off-price store called “365 by Whole Foods.” The idea behind the “365” store is to offer its existing line of lower-priced product along with a few other products in a smaller-than-usual space. That move has more than a few strange aspects to it, starting with the name. The name might make a lot of sense to company insiders since “365” is the name of its private label. Maybe some consumers know that, too.

But to many other consumers, it will seem meaningless and unrelated to the iconic Whole Foods brand. It’s also unusual because it’s nearly without precedent to name a store after an existing private brand.

Typically, private brands are intended to further the aims of the core banner. Possibly Whole Foods was inspired by Canadian Superstore Loblaw’s “Joe Fresh” stores. Joe Fresh is Loblaw’s private label affordable-fashion apparel line. The “Joe Fresh” stores gave Loblaw the means to expand the label into new territory. In contrast, 365 product is available in all Whole Foods stores, so why invite customers to go elsewhere in the same market to get it? All planned “365” stores will be in existing market.

Finally, Let’s face it: The “365” concept is no more than a knockoff of Trader Joe’s. Unfortunately for Whole Foods, Trader Joe’s has quite a running start and has captured the high-quality, low price territory.

However, when it comes to targeting the Trader Joe’s customer, Whole Foods isn’t alone. Hard discounter Aldi intends to introduce a range of organic and specialty products that are positioned against Trader Joe’s. Aldi’s “Simply Nature” is already its fastest growing brand. Incidentally, if Aldi creeps too far upscale in terms of product and price, it too will enter the danger zone. Up to now, Aldi has been able to keep its core low-price discipline and image.

The Better Way

Whole Foods’ “365” project brings to mind the dilemma posed by other outlet stores. At what point do the lower prices available in an alternate venue start to erode the equity of the main store?

We’ll see what happens as Whole Foods starts to roll out its first five “365” stores next year. Maybe the store will a big winner, but it seems more likely that Whole Foods would have done better to stick to its core strategy. Considering the cost and energy that will be expended on the new store, Whole Foods could have instead made more price investments and undertaken a stepped-up marketing campaign intended to convince consumers that its prices really are more reasonable than they might think.

To be sure, changing a retailer’s image is slow work, but sometimes it can be ultimately unsuccessful, as many retailers have already found out. Supermarket operator Food Lion has been working for quite a while to recapture its low-price image, and there’s still work to be done.

Supermarket operator Haggen is now closing more than two dozen of the stores it just acquired because it couldn’t find the right price to offer its consumers.

This is true across other retail channels, as apparel retailers such as Abercrombie & Fitch have discovered when they lost their core niche and value image. There are many avenues to success, but sticking to one core strategy and doing it well is very often the better way to success, regardless of the retail channel.

Charade is a nice way of describing what I believe to be the biggest issue in mainstream retailing today. The charade? “Spinmeistering,” including many of the top executives across all retail sectors — Nordstrom’s, HBC, (Saks Off Fifth and Lord & Taylor), Macy’s, Bloomingdale’s, Kohl’s, J Crew — and others believe they have a great growth strategy by accelerating the opening of off-price stores in pursuit of the younger value customer, who they claim will eventually graduate to their full-price stores. If you believe this, then I have a bridge in my hometown I’d like to sell you. And let’s be clear, these off-price stores … are not. At best, they are outlet stores. At worst, I would describe them as discount stores — because that is, in reality, what they are. For example, the consumer sees Saks connected to Off Fifth on the nameplate and they believe they are getting Saks Fifth Avenue goods at discounted prices, period. Over time as their discount stores outnumber their full-price stores (which is already the case for some retailers); consumers will perceive the flagship brand and the discount store brand to be one and the same. Sadly, they will happily continue to shop in the brand’s discount store where they can get it cheaper. The charade becomes the reality.

Retailers’ spin on this path to positive growth is a scary charade because it’s really a strategy of desperation. All retailers are desperate to find growth in a slow-to-no-growth, over-stored economy. For the public companies tethered to Wall Street, even more so. Because of the over-supply against tepid demand, requiring mind-numbing battles to capture share of a static market, it doesn’t take a Ben Carson to understand that the two paths of least resistance for growth are acquiring it or discounting. And discounting in all of its forms (including opening discount stores) is faster and easier.

There is now going to be no end to discounting because all the players must dance as long as the music is playing. And it will ultimately drag everything down with it, including brand image, potentially quality and essentially the value of all things. This will be at the expense of consumers; the very people retailers should be focused on and trying to win over through better and more innovative real value.

Into an Economic Black Hole

Where does it end? It ends where it started. Devaluation turns into deflation, turns into recession. And the recent Great Recession is where it all started. Instead of allowing free market, and Darwinism to work in 2008, harshly shedding the non-productive excess created in the “bubbles,” the Fed decided to avoid a depression by printing money and flooding the economy with it. (Refer to: Land of Opportunity And Barren Wasteland) This quantitative easing, or whatever other veiled terms economists use, was supposed to stimulate the economy by making cheap capital (close to zero interest rates) available to businesses. These companies would then, theoretically, invest in growth (on the supply side): new plants, equipment, stores, services, etc.; thus, more jobs and higher wages, which in turn would get consumers to buy, buy, and buy more. As consumption makes up roughly 70 percent of GDP, according to this theoretical master plan the economy would bounce back.

The theory didn’t work. In my opinion, forget what the current reported growth and lower unemployment numbers say. I believe most of our economy is still acting recessionary. The theory didn’t work because the “free money” was not used by corporate America to invest in organically building larger businesses and hiring more workers. Why? They simply could not see enough increased consumption on the demand side to warrant the investment in expansion.

Ironically, because of the conundrum of needing to deliver growth when there is little-to-no demand, corporate America is accelerating its use of “free money” to acquire growth. Unfortunately, in this environment, this does not drive any new demand and consumption or higher wages, it just provides the acquiring company a larger share of a pie that’s shrinking. Worse, rather than adding jobs, consolidations always eliminate the jobs that overlap between the merged companies, in addition to other cost-cutting economies of scale. This is not real growth.

Another investment irony is that we live in a crazy tech culture with billions of dollars rewarding startups. Amazon is the standard bearer for losing money to juice top line growth, expecting profits somewhere in the distant future when the business reaches some vague level of critical mass. Investors will continue to throw (cheap) money at Amazon and its wannabes until they do. Of course, eight out of ten of them never will, but while they’re burning through the investors’ cash, and giving away whatever it is they are selling, they are lowering all ships and simply exacerbating the discounting madness.

The Biggest Irony of All

This race to the bottom (to use my over-used phrase) continues. We are pumping and pushing more and more stuff out into a marketplace in which there’s not enough demand to sop it all up; so the cutthroat discounting (in all of its forms) continues. The great “value strategy” charade is that retailers actually believe discounting to be a whole new market for them. What they are really succumbing to is a competition for cheap, cheaper and cheapest, when they should be pursuing good, better and best.

At the end of the (not so pretty) day, retailers and brands will get exactly what they are asking for: nothing begets nothing. At some threshold on the way to the bottom “I got a great value,” simply becomes “I got this cheap, “and that will define their brands. There is no value in that proposition. There never was.

Here is one more glaring example of the absurd and frankly, stupid “short-termism” of Wall Street and the investment community.  Doug McMillon, Walmart’s relatively new CEO, its youngest ever at age 49 and its first merchant-chief since Sam Walton, recently committed to invest not only in the right strategies for long term sustainable growth, but also the winning strategies that could crush its nemesis, Amazon. Shameless reminder:  I posted in an April, 2014 article WalMart Can Crush Amazon.

Wall Street, with its casino culture, speed-trading paper for immediate wins vs. investing for real value, defines “long term” as this quarter. When McMillon announced last week that instead of forecasting an increase in 2016 earnings (which analysts estimated at 4 percent), he’s predicting a 6-12 percent drop, it was like the sky was falling. Walmart’s stock crashed 10 percent; the biggest one day drop in 17 years … on top of the fact that the stock was already down 22 percent this year.

Wall Street’s reaction was typical of the “short-termers.” They listen, but do not hear. They did not hear, nor did they understand, because the word strategy is not in their lexicon. McMillon’s long-term strategy, and the investment required to achieve it, would by necessity cut into earnings. McMillon committed a $2 billion investment over the next two years to kick start Walmart’s snail-like progress in its global e-commerce and its omnichannel component. He committed another roughly $2.5 billion in costs to raise employees’ wages. And this is all on top of the ongoing investments in elevating the store experience, rolling out its smaller store format, and opening more distribution centers to service its e-commerce efforts.

It’s ridiculously ironic that Wall Street has rewarded Amazon since day one, almost two decades ago, for not making any money, so Bezos can “get big fast.” Yet, they won’t acknowledge that Walmart, the largest company in the world, yes, the largest at over half a trillion dollars, and the world’s largest employer, has a focused strategy for becoming a 21st Century leader in the use of the Internet and all contiguous technologies — as well as crushing Amazon along the way.

“Get Big Fast” Is a Relative Term

Jeff Bezos can still use his objective of getting big fast as justification for zero to minus on the bottom line when comparing Amazon’s roughly $90 billion in sales to Walmart’s roughly $500 billion. However, at some point (and we’re already seeing it), getting big fast is going to turn into a Wall Street call out of “show profits now.” And while Amazon has made a little bit of money over the past couple quarters, with traffic and revenues growing nearly 20 percent, the bigger they get, the more difficult it will be to maintain that rate as pressure from Wall Street continues to mount.
On the other hand, even though revenues at Walmart are growing at a tepid 3-4 percent annually, it equates to roughly $20 – $25 billion a year. They’ve been making money, not losing it.

So, now McMillon says to Wall Street (in my words): “Hey guys, in the spirit of good public transparency, I’ve got a specific, focused strategy, for which I’m going to invest billions of dollars over the next several years. It’s going to take a big chunk out of my bottom line to do so, but at the end of a relatively short period of time, given our gargantuan size, I will have this ship turned around with the technology winds at our back. And you’ll see profitable growth rates like you’ve never seen them. I know you guys are short-termers. I wouldn’t call you greedy, although some would. Anyway, you should understand what I’m saying, because in the long term you could make a ton of money.”

Actually, McMillon said in his own words: \”This is a growth company — it just happens to be a really large growth company.” Then in his personal blog he wrote: “The reaction by the market — while not what we’d hoped — was not entirely surprising. These investments are critical to our current and future success as a company. Simply put, it’s the right thing to do.”

He went on to say in an interview, “We know what we did in the past wouldn’t by itself be enough to win with customers. Retail history is very clear. Those that are unwilling or unable to change go away.”

And on that note, I will say this: McMillon is doing the right thing. Anybody with a long term view of investing in the growth of real value would be crazy not to look very closely at what I would consider an opportune “fire sale” low stock price, driven down by the short term, non-strategic gamblers on Wall Street.

If So, Is Stefan Larsson Up to Chief Navigator?

Let’s take a minute and talk about the three major storm fronts that seem to be colliding at the same time in the “House of Lauren.”  In my view, these fronts could be creating the horrific perfect storm that may very well tip the brand onto a slippery slope downward.  And if newly hired CEO Stefan Larsson turns out to be “no Roger Farah,” so to speak, the downward slide will accelerate.

Storm number-one began when COO Roger Farah left the company.  Arguably, he was the best strategist, as well as operating and business executive that Mr. Lauren ever had. Roger is considered one of the industry’s finest leaders, and his departure had to have been one of the major catalysts for the recent decline in Lauren’s sales and profits.  This storm alone — if it were happening in a normal, reasonably healthy geo-political and economic world and in a balanced, reasonably competitive and growing U.S. economy — could be viewed as a mere hiccup in a normally volatile industry and financial environment.

But that storm isn’t the only weather front, nor is it happening in a manageable, normal macro-environment.  Because the business decline is also happening at the onset of storm number-two. This second storm is causing the biggest and most profound transformation in the history of retailing. It is driven, indeed forced, by the full-on effects of the Internet, new technologies and globalization. And these disruptions are being uber-powered by the largest and most powerful emerging consumer culture since the boomer generation: the millennials, of course.

Finally, the third storm, which has been growing in intensity across the entire industry and is described by most C-level executives I talk to as the most destructive, uncontrollable and unavoidable storm of all. It is the absolutely insane pricing tactics and other forms of discounting that are spreading like a stage-four cancer throughout every sector of retailing, both online and off. Indeed, this storm alone is powerful enough to sink a lot of ships.  The perfect storm of all three fronts combined will leave a lot of retailers in its wake.

Does Mr. Lauren Understand the Power of These Storms?

My guess is that Mr. Lauren fully understands the effect of storm number-one on his business and likely why it’s happening. He probably believes it is controllable and correctable.  The simple answer of course, and with a not so light-handed nudge from his friends on Wall Street, grow baby, grow. How to grow is the $64K question.

And Mr. Lauren would have to be living on Mars not to see storms two and three brewing on the horizon. His son David clearly understands the digital and technological aspects of storm number-two, and is guiding many of the strategies that are transforming the business in those areas.  Also, with all of those very capable professionals throughout the organization, Ralph Lauren understands globalization and its enormous opportunity for growth.  Finally, the organization clearly understands the emerging millennial culture.  However, understanding all of the dynamics of storm number-two is one thing. How to turn those dynamics into growth is a totally different  — and an enormously challenging exercise.

Lastly, the final storm of discount madness and race to the bottom (particularly for a luxury brand like Ralph Lauren) is almost impossible to understand and totally impossible to control and avoid.

So, Ralph and company understands the storms and their various elements, but apparently as he sensed the potential destructive power of this perfect storm, he believed he needed a more skilled chief at the helm to navigate the business through to greater growth opportunities.  Accordingly, Mr. Lauren made the incredibly surprising decision to cede his CEO title to Next Gen, 40-year-old Stefan Larsson, current President of Old Navy, apparently believing he is a more skilled chief.

Is Stefan Larsson Seaworthy?

Mr. Larsson comes on board with the experience of 15 years as head of global sales for H&M where, according to some, he was instrumental in expanding the business across 44 countries to its current $17 billion in annual sales.  This was followed by his three-year stint as President of Old Navy, where he was successful in adding a billion dollars to Old Navy’s top line, reaching $6.6 billion in 2014, and turning it into Gap Inc.’s sole growth engine.

Not so incidentally, I point to the fact that he arrives with absolutely no wholesale experience.

Some of the immediate head winds Mr. Larsson will encounter as he takes the helm are a 5.4 percent decline in sales in the first quarter of the 2016 fiscal year, coupled with a 60 percent drop in net income.  Also, earnings before interest, tax, depreciation and amortization have fallen from 20 percent of revenues in its 2013 fiscal year to an estimated 15.5 percent for 2016.

Although the decline has been explained by costs attributed to a major restructuring and currency exchanges, Mr. Larsson will have to hit the ground running. He will have little time to develop his strategic, longer-term goals to achieve the level of profitable growth that Mr. Lauren has apparently hired him for.

Is Larsson up to it?

His track record at H&M and success in powering growth at Old Navy were the result of his supply chain skills and expertise in how the fast-fashion process works.  He was able to apply a hybrid version at Old Navy, increasing speed to market, thus turning out more new lines, more often and more efficiently than produced by traditional supply chain cycles (adding more top and bottom line growth).  Secondly, Mr. Larsson gained global retailing skills during his H&M tenure, which many analysts believe will provide greater impetus to Ralph Lauren’s international growth.  The general belief is that 30 percent of sales should be generated by each of the three regions of the U.S., Europe and Asia, while Europe is currently providing 20 percent and Asia, 12 percent.

So these are generally perceived to be Mr. Larsson’s primary skills, which would be effectively applicable to Ralph Lauren’s business.  However, I would point out that his skills were applied to value-driven brands, which would lead one to question how Mr. Lauren would find Mr. Larsson’s expertise in that sector transferrable to the luxury positioning of the Ralph Lauren brands. Furthermore, while one might assume Larsson honed his leadership skills during his three-year stint as President of Old Navy, as he takes the helm at Ralph Lauren Inc. he will immediately become the boss of many highly seasoned and accomplished professionals — many as his direct reports.  Of course I’m sure Mr. Lauren carefully weighed that fact into his decision to hire Larsson.

Oh, and then there’s that “no wholesale experience” thing again.

What might be a major positive among Mr. Larsson’s skills?  My speculation is based on the fact that a large (if not the largest) percentage of sales and profits are generated by Ralph Lauren’s more basic goods like polo shirts and khakis, sold through outlet stores and off-price distribution, as well as through mainstream retail sectors.  In my opinion, Mr. Larsson’s skills in the fast fashion supply chain process and its positive result of producing more new lines with greater efficiency is a synergy that could yield more profitable and sustainable pricing strategies — plus accelerated growth.  His experience could provide a huge defense against being sucked into the vortex of discounting, the uncontrollable storm number-three.  And I hasten to add that Larsson may have the strategy to protect against consumers’ perception of the devaluation of the Ralph Lauren brand.
Assuming this strategy, or a version of it is planned under Mr. Larsson’s watch, there is a huge “if” attached to it: “if” Mr. Larsson can implement such a strategy.

And, the successful implementation would be up against some major challenges emanating from storm number-two and the emerging millennial culture.  The millennials expect and reward such rapidly changing new lines at great prices from the likes of H&M, Zara and apparently Old Navy. But as designer Michael Kors expanded into all price point sectors of distribution, becoming ubiquitously accessible, the brand finds itself going from hot to cold and the financials are following suit. Is the Kors experience the calm before Lauren’s inevitable perfect storm?

Mr. Larsson will need to navigate a fine line between newer, faster, credible and great value for the brand, and more, newer, faster and just plain cheap.  Furthermore, this millennial generation is more brand-agnostic and fickle than the retiring boomer generation for two reasons: 1) they have unlimited and instantaneous access to thousands of equally compelling brands, (scanned through in minutes on their smart phones); and 2) they tend to make special individual choices that offer exclusivity and what they think looks cool on their own bodies, over the brands that have become ubiquitous, on every body, as being exemplified by the Kors experience.

How to give Wall Street infinite growth while maintaining scarcity and exclusivity has always been an oxymoron.  It’s a big reason why luxury fashion brands should not go public.  However, Mr. Lauren’s enterprise is just that, and he must live with it. Therefore, the oxymoron becomes strategy number one.  However, executing that strategy for this new generation of consumers is going to be a “storm number two” enormous challenge.

Regarding Mr. Larsson’s international retailing experience during his 15 years at H&M as head of global sales, one could ask how sales skills in the fast fashion space, and again in a vertically-integrated model with no wholesale experience, will add value to the global expansion strategies of a multi-faceted, more complex business.

So What’s The Answer?

I do not have an answer (or an opinion, surprisingly) regarding whether or not Stefan Larsson will be successful in leading the Ralph Lauren enterprise with all its brand extensions to a new, faster and more profitable growth trajectory.

I do, however, have a question that should raise many red flags.  Will Mr. Larsson, with the skills cited in this article, end up taking the brand closer to the race to the bottom, which is a debilitating downward slope to competing in the world of commodities. This is what much of our apparel world has become.

If so, than it’s not only bye-bye Stefan Larsson, but, bye-bye to the image of one of the greatest American brands in all of history.

My favorite 14-year-old girl, like so many in her generation, is lost without her phone. In spite of school, sports, eating and sleeping, she spends almost eight hours a day on social media. Instagram and Snapchat are her addictions. Selfies are taken and posted hourly. In the social media scheme of things, Facebook is only for old fogies. The worst punishment Mom can give her is to take away her electronics. She is a 21st century girl. And yet the way to her heart is to take her shopping. T.J.Maxx, Joe Fresh, H&M, Anthropologie, Uniqlo, Hollister—she has outgrown Dylan’s Candy. I often hire her to take retail pictures for me. She is cute snapping pictures; I, on the other hand, am intrusive.

Marketplace Mentality

We, as a species, have been going to marketplaces since we were hunters and gatherers. It was not just about the acquisition of goods; it was about a meeting ground to look at and interact with other people, especially strangers. Our fascination with shopping may be as much about natural selection’s predisposition against incest as it is the need to acquire. Get them out of the house to meet new people and give them joy with owning something new.

Doubling Down

For most Gen-Xers and millennials, the mall was the first place they got to be their independent selves. It was the first place they met strangers that didn’t live on the same block, go to the same school or attend the same house of worship. It was the first place they got to see the broader world and spend (and sometimes make) their own money. While some B and C malls across the country are failing, try finding a parking space at Short Hills or Garden State Plaza on a Saturday afternoon. It’s a tale of three malls.

Mall Mavens

Across the developing world, malls, or what we refer to in the industry as organized shopping, offer a series of virtues that cannot be found on an urban street. The mall is climate controlled and clean. Since shopping in 2015 tends to be a female activity, hygiene plays well globally and the mall is doing just fine. The mall is also safe. In many countries it screens its visitors with security checks, not unlike airports, and operates its own private police force that make our mall cops look like patsies. In 2013, the terrorist attack on an upscale shopping mall in Nairobi resonated everywhere—but particularly in developing markets.

The demise of retail is a result of aging white males who were programmed like hunters to walk in the door (or the forest), shoot something quickly and drag it home. They are relics of the past. And for them, we have Cabela’s, which is the top tourist attraction in some of the states it is located. Guys drive for hours and camp in the parking lot. As an urban person, when I visited the mothership of Cabela’s outside Sidney, Nebraska, it was as close to the dark side of the moon as I‘ve gotten. Yet it’s a highly successful male-focused, thriving retail-empire where the shopping therapy side of a male’s brain can be indulged and not judged. The presence of guns, fishing tackle and duck blinds give the male visitor permission to buy pants, shirts and underwear.

Retail of the Absurd

Make no mistake; modern shopping is in an uproar. As a culture, we are over stored. There are too many places to buy the same stuff. Almost all American retail chains would be healthier if they could shed 30 percent or more of their underperforming properties. The root of the problem rests on Wall Street where those same chains are more answerable to analysts looking for growth and stock price, than the historic retail measures of profits (cash), customer satisfaction and loyalty.

North American retail empires often struggle as they get past the germinating passions of their founders. Anyone remember Gimbels, Altman’s, Montgomery Wards, Korvette’s, … much less Woolworth? When a store brags they’ve been “Open since 1937,” it’s about still being alive when all of your competition is dead. But survival does not equate to success. We celebrate our merchant gurus including Gordon Segal, Mickey Drexler and Les Wexner whose minds, hearts and guts built remarkable enterprises. The real question is whether they have been able to institutionalize their visions into their organizations to continue on when they are gone. The passionate merchants who have the vision and resilience to sustain a brand are few and far between. The world of stuff has changed and the role of retail curator is now subjected to markdowns and knock-offs.

All the abundance of choice for things we don’t need is creating a fatiguing sense of commoditization. As an antidote, in 2015 we tend to celebrate how little we spend for something rather than how much. Our immediate access to pricing information for industrially produced stuff gives us power. We can ferret out the value of things ourselves, not be led by marketers who can’t resist the spin.

Our value-power is coupled with a new sense of personal preference for what we do want, when we want it. Thus, Murray’s Cheese at New York’s Grand Central Terminal or in selected Kroger store-in-stores can sell us artisanal French Brie or Swiss Emmental at prices we are very willing to accept, whereas a Toshiba laptop purchase tends to get relegated to the lowest priced merchant.

Shopping Fatigue

I repeat a line I have used hundreds of times: After age 40, roughly 80 percent of our weekly purchases are routine. Why should we have to go back to the store to buy the same stuff? Our future will be simplified by smart kitchens that text us weekly shopping lists that we can add to or edit, and then place the order either for delivery or pick-up. Let me save my shopping energy for what really matters. I will shop for fruits and vegetables at the farmers’ market where I can talk to the people who grew them, and feel a sense of artistry when I pick out the ones that please me. Laundry soap, sugar, paper towels, toothpaste, bottled water: that’s a rote replenishment buy.

Online Memes

Yep, the online world of shopping and buying is growing. Amazon Prime is a genius idea even if the FAA is unlikely to permit delivery drones in the next five years. But for all of its cool factor, the Web has flaws. So many good ideas are subject to instant knock-offs. Unless you are able to build seriously and scale quickly, e-commerce is subject to overnight cannibalization. And with the Web, everything has equal weight. It can propagate the Protocols of Zion and the Psalms of David equally.

The e-commerce world has been taken by surprise by how fast Internet access migrated from laptop to the tablet and smartphone. The ubiquitous online solution has been seriously challenged. How we shop on different devices tends to be very different, and all our measurement engines for understanding online behavior are based in click streams (what we do) rather than finding ways to understand why we don’t do something.

For example, the male geek world has struggled to understand why some women spend hours shopping online and buy nothing. They don’t realize the 14-year-old and many of her kind are bored with reruns of 90210; they have no intention of buying online, but have very healthy fantasy lives that need to be fueled by trolling through shopping sites.

If we are honest, we should look at our retail landscape and recognize that change is healthy. What made a good store or point of sale in 2000 is different from what works in 2015. Retail is a good dipstick to presaging the evolutionary changes in us. It’s also a point in case of natural selection that some retail businesses will die. One way or another what is steadfast, and gives hope to all merchants and their customers, are our emotional, psychological and physical needs for stuff.

My favorite 14-year-old, whose closets are totally stuffed, still wails that she has nothing to wear.

I have seen sheets—high-thread-count, perfectly percale, cotton as soft as a baby’s bottom—made…and it’s not a pretty sight.

Can you say formaldehyde?

While all kinds of cause celebs are breaking out over what goes into the food we eat, we are starting to see the first signs that the same thing is happening in the products we use in our homes. Be it furniture, frying pans, crystal glasses or—most recently in the headlines—wood laminate flooring, the same demographic factors that are impacting food are descending upon the home furnishings business.

We all know what’s going on in the food business. Whole Foods started the movement for people being interested in where their food comes from and what happened to it when it was grown, raised or otherwise transferred to your kitchen.

The impact of Whole Foods is irrefutable: Walmart is now going organic and it doesn’t get any more mainstream than the Boys from Bentonville. Next up were the fast food restaurants. Chipotle stopped serving pork when it couldn’t guarantee a steady supply of properly sourced meat. Other national chains have followed, even including McDonald’s, which announced recently it would stop serving chicken that had been dosed with antibiotics. It doesn’t get any more mainstream than Ronald and the Hamburgler.

It’s What’s Inside That Counts

This movement to know the provenance of what you are putting in your mouth is now spreading to what you put in your home. Not that this is entirely something new. The state of California—as with many things— has been in the vanguard of the product safety movement particularly as it relates to the individual components that compose finished products. All the way back in 1986, the state passed what is generally known as Proposition 65, which had to do with cancer-causing elements and chemicals in a variety of items, from drinking water to glassware and ceramics. The law immediately became a source of contention between suppliers and legislators, and despite decades of debate and no doubt some serious lobbying, the law remains on the books.

So when you buy fine lead-crystal wine glasses or handmade ceramics, somewhere there in the small print you’ll see some legal gobblygook about the product meeting—or sometimes not meeting—the Proposition 65 standards. Other household items like paint and non-stick cookware are also regulated in assorted places and are often the target of well-meaning zealots ranting and raving about their hazards. Not being a chemist—or a painter or much of a cook for that matter—I can’t tell you who is right and who is ranting.

Sheets Happen

Which brings us back to those sheets. Before the industry largely moved offshore during the last decade of the 20th century, just about every sheet sold in the country was made here. And they were made in huge, highly efficient and largely automated textiles mills in the American Southeast. They were also made with tons and tons of chemicals. The process of taking raw cotton — and sometimes polyester — and making it into a soft, fluffy piece of fabric you sleep on involves lots of steps and lots of processes.

And lots of chemicals…including the aforementioned formaldehyde. I never quite figured out exactly what they needed the formaldehyde for and I tried to accept them at their word that it was washed out before the sheets were ready to be put on your bed. Me, I thought I was done with formaldehyde when I got out of 10th grade biology…you know, the one with the frogs.

A Flawed Floor Story

Now Lumber Liquidators wished it was done with formaldehyde back then too. The company is in a tailspin affecting its business, its stock price and perhaps even its very survival because of the chemical. To say it has been floored by what’s happened over the past few months is both a terrible pun and the understatement of the year. Founded in 1993, Lumber Liquidators grew to more than 200 stores in 46 states and became the darling of Wall Street and a favorite for budget-minded home remodelers.

It all came crashing down earlier this year when 60 Minutes did an investigative piece charging that the company’s laminate flooring contained high levels of formaldehyde. Now, there is no federal standard on formaldehyde levels in products like flooring, though there is one in…wait for it…California. And according to the 60 Minutes investigation, flooring sold by the store did not meet that standard even though it was labeled as such.

It wasn’t long before the stuff hit the fan and Lumber Liquidators was on the defense. First it said it wasn’t true and its products met the standard. Then it mailed out test kits to customers. Then a major retailer, Lowes, announced it was dropping one of the company’s laminate flooring products from its stores. And then in early May, Lumber Liquidators said it was pulling its Chinese-made flooring products even though it said the vast majority of its test results showed it was within World Health Organization standards. All the while, its sales have continued to tank—18 percent in March—and the stock has done even worse, dropping more than 60 percent since the TV report.

No doubt there will be lots of lawsuits and legislative committees holding hearings over the next several months. And there has already been one pretty big corporate casualty: CEO Robert Lynch suddenly resigned in mid-May under circumstances that are not quite clear yet. It’s likely that the retailer will survive, though it will probably have taken some more serious hits before
it’s all done.

Chemicals Compounded

But all of this is going to impact the way home products are going to be sold going forward. The people eating at Chipotle and Panera are the same people who will be buying couches and rugs and frying pans and sheets and the industry better understand this.

Which is why a couple of basic observations are critical here:

1. Retailers and suppliers have to know where and how their products are made. It isn’t enough to know that the factory isn’t polluting or exploiting underage workers or doing it all in unsafe facilities. Now it’s going to matter what went into that product. This is going to be a huge adjustment for a business raised on petrochemical components.
2. None of this means a return to domestic manufacturing. Factories in the U.S. are every bit as capable as their Asian counterparts of making products of questionable natures. The race downward in product quality—driven by a relentless focus on prices led by Walmart—is going to require a major mental reset. Consumers have shown they will pay for a better version of a product if the supplier and/or retailer can give them a reasonable explanation why. Dyson did it to Hoover, All Clad did it to Farberware and the list goes on.
3. Finally, when someone blames the Chinese for making sub-standard products, stop the person and tell the truth: We taught them everything they know about making modern commercial products and they are just doing what we told them to do. Back when the country was building its sourcing business in the 1980s and 1990s, if we had told them to make the good stuff they would have been more than pleased to oblige. But we told them we wanted crap.

So, the rules are changing in home furnishings as they are in food. And they are changing fast when it comes to manufacturing processes, components and ingredients.

Remember the old DuPont marketing slogan, Better Living Through Chemistry? You don’t hear that so much anymore, do you?

Back in the 1950s with McCarthyism barely in the rearview, my parents always warned me never to sign anything for fear I would be a branded a Communist agitator. I was 6 at the time.

In the 1960s and 1970s as garbage piled up and crime ran rampant in a deteriorating New York City, we were told: “Don’t get involved.”

But the pendulum, as pendulums do, has swung in the opposite direction. Since the early 2000s, corporate social responsibility has become a moral imperative, as important a part of every company’s mission statement as profits, and the pathway to gaining the respect and loyalty of a younger socially conscious demographic.

Even in the cold, heartless canyons of Wall Street, where return on shareholder equity is a religion, socially responsible investing is becoming de rigueur. This is in no small part thanks to people like Warren Buffett and Bill Gates, whose personal fortunes are supporting social causes throughout the world as well as retailers like Starbucks, Whole Foods, Walmart and Loblaw—the only Canadian company to sign the Bangladesh Accord after the Rana Plaza factory collapse.

Then there are the persistent consumer advocacy groups demanding—or at least requesting—“social audits” in order to make a company’s activities more transparent.

Playing the Odds

I’m willing to put up hard cash that most companies, given the choice, would like nothing better than to remain asocial. The odds of coming out on the right side of the big, messy and convoluted issues such as the First Amendment, religious freedom and cultural values are slim. There will always be a backlash from some group, somewhere.

However, it is no longer possible to sit on the sidelines.

For the past decade, companies and top executives have become increasingly brazen in their defense and opposition to major social issues. They are putting skin in the game with financial and philosophical support of cultural issues such as race, religion, the environment, marriage equality, civil rights, gay rights and animal rights. They are also joining social justice efforts to save everything from humpback whales to the Piping Plover.

There is a growing list of companies for whom sales and profits are a means to an end or, as Whole Foods CEO John Mackey calls it, “Conscious Capitalism,” recognition that companies have a higher purpose.

Buy a pair of TOMS shoes and another pair is given to a child in need. In fact, the company works with over 100 partners globally to supply shoes, drinking water and eyewear to people in need. Warby Parker, which has set the traditional eyewear industry on its heels, distributes free glasses for every pair sold. Patagonia is the poster child for environmental stewardship, and fashion industry icons Ralph Lauren and Donatella Versace are deeply involved in cancer research and children’s organizations.

They have taken to heart the words of the 18th century Irish political philosopher Edmund Burke, who said: “The only thing necessary for the triumph of evil is for good men to do nothing.”

On the other hand, noted economist Milton Friedman espoused the theory 40 years ago that the social responsibility of business in a free enterprise system is to increase profits, and therefore, executives are simply agents of the company with their ultimate objective being making as much money for the company as possible.

I wouldn’t dare spar with an intellect like Friedman nor his disciples. But it seems that he had an answer for simpler times. Business, for better or worse, has clearly evolved to a point where it is irrevocably intertwined with social issues. Altruism and activism are part of a broader corporate strategy that is quite simply good for business.

Transparency

Clearly, social responsibility, ethics and even morality can be subjective. However, the Center for Business Ethics at Bentley University in Ma. has reported that nearly half of the 1,000 largest corporations in the U.S. have in-house ethics programs and codes.

Many of the good men and women who run them have come from every corner of the retail industry. They have the courage of their convictions; unafraid to speak out against what they see as injustice and, in doing so, put their company’s reputation on the line.

But when it comes to involvement in social issues, the big questions are how and when? And at what point, in either mainstream media or social media, does an opinion become an intrusive rant that puts the brand itself in danger?

Look at some recent developments and how they fared.

Freedom of Choice

Apple CEO Tim Cook, who last year announced he is gay, is a vocal and powerful opponent of discrimination against gay, lesbian and transgendered people. He is only one of the many Silicon Valley power brokers flexing their muscles on social issues, some of whom have stated they will reduce their investment and employees in states that pass laws with which they disagree. On the downside, Apple continues to be scored by advocacy groups for shipping manufacturing jobs overseas to take advantage of cheaper labor.

Companies like Walmart, Levi Strauss, the Gap and NASCAR were among the corporate giants that vociferously criticized Indiana’s Religious Freedom Restoration Act and similar legislation in Arkansas, which they felt would legalize discrimination based on sexual orientation.

On the other side of the religious and marriage equality issue we have Chick-fil-A, the Georgia-based purveyor of chicken sandwiches and traditional Christian values. Although the company is looking for expansion in major cities, home of the legendary liberal urban Millennial, CEO Dan Cathy came out against same-sex marriage. He was being true to his long-held Christian beliefs, but it also came out that the company’s trust has made millions of dollars in donations to anti-gay organizations. This resulted in a half-hearted attempt at a boycott. But the chain dodged the bullet, proving that a strong brand image and fine chicken sandwich trumps Constitutional principles any day of the week.

Another retailer that sent ripples through Constitutional law and religious freedom was Hobby Lobby, a family-owned company whose Christian beliefs didn’t jibe with providing contraceptives under Obamacare. The argument ended up in the U.S. Supreme Court, which decided in the chain’s favor. This set a legal precedent and there was an outcry from some segments of the public. But people seem to like their hobbies as much as chicken sandwiches and little, if any, lasting damage will be done to sales.

On the other side of the coin, companies like Nike, Office Depot and others have come out firmly in favor of such issues as marriage equality, a stand that didn’t seem to have a positive impact on sales either.

Equality and Fraternity

Long before the racial strife in Ferguson, Mo., Baltimore and New York came to a head; Starbucks CEO Howard Schultz championed a national debate on race. His motives were sincere but his #RaceTogether campaign on coffee cups was ill conceived for several reasons. People willing to fork over $5 for a cup of coffee want cappuccino not conversation and they certainly don’t want to debate on a sensitive issue with their barista. They want what most customers want—to get in and out quickly. Hashtag activism is not on their agenda. Additionally, it put employees in the middle of a debate they may not be prepared to have and their opinions may open up a proverbial can of worms and create more confrontation than conversation with customers.

Overall, business has to learn how to navigate the waters of social activism in order to serve society while protecting its brand image. Consider these elements:

• Don’t try to be all things to all people. It only dilutes your message. Prioritize the issues you want to address based on your company’s culture and expertise. For instance if you’re in the food business focus on that and try to get your suppliers involved.
• Make sure executives understand that their personal pet causes are just that and not to involve or push the company into taking a stand.
• Involve employees on a strictly voluntary basis. Don’t mandate it as part of the job.
• Don’t bother spending millions of dollars on advertising and public relations or hire expensive advisors if you’re not willing to follow through with a CSR strategy that has real objectives and is not just window dressing.
• Create a “shared value” with consumers by connecting the company with a specific social purpose. For example, Nestle defining itself as a nutrition company rather than a food conglomerate.
• Focus on grassroots or community-based issues or sustainability issues rather than getting involved in sensitive national debates.Business, like life, is a battlefield. Watch out for landmines.

You have been working hard and deserve a vacation. If you were told you would have the perfect “dream” vacation but have no memory of it afterwards, how much would you be willing to pay? Chances are, not very much. But, why? Even though the experience of the vacation would be utterly blissful, it would fail to deliver what we really want—memories. In our search for meaning, those memories help us build a personal narrative of our lives and are more valuable to us than the experience itself, and as research tells us, even more valuable than material possessions.

It is not just tourists that seek memorable experiences. Research in behavioral psychology has produced compelling evidence that experiences make people happier than acquiring material possessions. Once basic needs are met, experiences like hiking, taking cooking classes and travel bring us more happiness than buying new cars, clothes or accessories—and this holds true across generations. The relative value we place on experiences also grows along with our income. That is, the more affluent we become, the higher the value we place on memorable experiences over new possessions.

So what does this mean for the makers and purveyors of material possessions? It suggests that retailers should do more to create memorable experiences that deepen the engagement with customers and perhaps even become a part of customer’s personal story. But how?

Insights from Hospitality

One place to look for answers is the hospitality industry. Although retailers can learn from hospitality to improve the quality of customer service, it is the fundamental insight that tourism is driven by a desire for memories and stories that can have the greatest impact on retail—especially retail design.

The hospitality industry has long responded to this insight by developing properties and programs inspired by, and unique to, each location. Stop for a moment and imagine a Four Seasons Hotel in Maui; now imagine one in Paris, and now imagine a Four Seasons Hotel in Beijing—three connected but very distinct images come to mind. Now do the same mental exercise with Gucci, Cartier or Dior. In each case, a single dominant uniform image comes to mind—the “place” is irrelevant. This is a missed opportunity for retailers to tell a richer brand story which will support a deeper engagement with customers.

The First Step—Sensitivity to Context

As a guest at a White House dinner with the President, one would give some thought to how one should dress and choose something that is appropriate to the occasion. Likewise, one would dress for a vacation in Bermuda or Maine differently than when interviewing for a job on Wall Street or planning a night out on the town. In each situation, one adapts one’s appearance and takes the opportunity to display different facets of one’s personality. It would be odd to show up at each event dressed identically, but worse, you would have missed the opportunity to demonstrate a certain intelligence and depth. And the same holds true for branded retailers who roll-out identical stores from place to place ignorant of the sensibility of each location.

One might argue, however, that the integrity of a brand depends on a strict adherence to consistent execution at retail and that any local adaptation will surely dilute the brand. But this view is based on a static and somewhat narrow view of brand identity; one that ultimately limits its power to engage with customers and influence consumer choice.

While a near identical roll-out is certainly easierto execute from a brand management and resource perspective, it fails to fully exploit, what branding guru David Aaker calls, the “brand as asset.” To fully utilize the brand as an asset, one needs a more expansive and nuanced view of brand identity. When fully understood, brands can be rich worlds and the character and sensibility of each store location is an opportunity to reveal—not dilute—the brand.

The Spirit of Localism

In Ancient Rome each neighborhood identified a protective spirit called a “genius loci” that reflected the special character of that district. Since then, genius loci has come to mean the “spirit of the place,” that distinctive ambiance or character. Tailoring each store to its unique environment offers brands the opportunity to tell a richer story and develop a deeper engagement with customers. Each store must, of course, be faithful to the brand but also reflect unique aspects of each location. That is, although they would both be faithful expressions of the brand, the design of a store in Barcelona would not be the same as a store in Paris. And a store on the Parisian Right Bank would not be interchangeable with a store on the Left Bank, as the character and sensibility of the two are distinct.

Although it is possible to find superficial attempts to connect store design with the location by installing historical images of the neighborhood, a few brands are truly adapting the store design to reveal the brand and connect with customer’s desire for memorable experiences. Leaders in this approach are Ralph Lauren, Tiffany & Co., Anthropologie and now even ubiquitous Starbucks appears to be experimenting with, what some call, “localism.”

Experiencing Localism

Perhaps the most consistent and confident exponent of localism in store design is Ralph Lauren. One only has to step in to the store in Aspen and instantly you know, first, you are in a Ralph Lauren environment and second, you are in Aspen. You are transported to the Aspen of your dreams and allowed to experience it. You can literally buy into that experience by simply opening your wallet.

The same can be said of the Ralph Lauren stores in Nantucket, SoHo, Beverly Hills, etc. Even the Paris stores on the Left and Right Banks are suited to their neighborhoods reflecting the refinement of Avenue Montaigne and the Bohemian elegance of St. Germain. Accomplishing what perhaps only an American brand could, the Ralph Lauren brand is big enough and confident enough to embrace the world without fear of diluting its clarity or strength.

Localism Revealing the Brand

Tiffany & Co.’s Fifth Avenue flagship store opened in 1940 and has provided design inspiration for the branch stores for many years. Up until around 2008, one could see a number of the details and materials of the beloved and famous flagship applied directly to new locations—with mixed results. Two philosophical shifts occurred that led to a new era in store design. The first was to look to the beauty and heritage of the Tiffany brand itself for store design inspiration instead of a narrower focus on the flagship building itself. And second was to look to the character and sensibility of each of the store locations for inspiration. Founded in 1837, Tiffany has a rich history and archives. The brand’s authenticity is one of its core assets. Creative adaptations in the design of each location provides an opportunity to reveal yet another facet of the jewel. The Barcelona store’s playful ribbon ceiling subtly reflects that region’s Catalan culture while also reinforcing Tiffany’s artistic heritage and penchant for whimsy. The store on the Champs Elysees reflects the heritage, glamour and optimism of this American in Paris while incorporating and celebrating traditional Parisian detailing.

Tiffany’s award-winning SoHo store simultaneously celebrates the brand’s design creativity and the area’s artistic roots by working with 30 artists and artisans, many of them local, and incorporating their work into the design of the store. The atmosphere is decidedly “downtown,” more relaxed, modern and visually stimulating than the midtown flagship. Locals see it as “their store” and tourists are rewarded with a glimpse at an aspect of the brand they may not be as familiar with.

Localism through an Artist’s Eye

Although immediately recognizable, no two Anthropologie stores are the same. This is partly due to the program to support and incorporate the work local artists into the stores. While this might be an afterthought or a half-hearted attempt to connect to the location for some brands, at Anthropologie it is at the core of its culture, centered on a celebration of individual expression. The local flavor comes to life in the store by looking at the brand through the artistic eye of a local. This ensures that the expression is both authentic and consistent with the brand identity.

The Limits of Localism Tested

The value of creating distinctive experiences rooted in the place where a store exists has been recently endorsed by Starbucks. “The mission of each designer is to create a spectacular Starbucks café experience that is steeped in the local culture and designed to reflect the unique characteristics of each neighborhood,” according to Starbucks.com. This can be seen realized in New Orleans, on Capitol Hill, and on London’s chic Conduit Street.

It is at Starbucks, however, that localism will likely face its greatest test. Although they have created a handful of admirable locally inspired locations, with over 21,000 cafes in 65 countries, it is unclear how localism can be managed and implemented at such a scale without creating brand management chaos or being reduced to superficial gestures. It is a worthy goal and we will be watching.

A Profitable Experience

The typical roll-out cookie cutter approach to store design will no longer be enough to remain competitive as consumers increasingly reward retailers who deliver what they value most—memorable distinctive experiences. Localism, where aspects of the spirit of the place serve as a catalyst to tell a richer brand story, is not easy, especially while maintaining a clear expression of brand identity. It requires a rich understanding of the brand, and most of all, creativity. But the reward is deeper customer engagement and ultimately growing profits.

Both Economically and Politically

Stock markets are crashing around the world, as I write this. China is cited as the culprit — or at least the catalyst. Some $10 trillion has evaporated from the global stock market since a June peak. The DJIA, S&P 500 and Nasdaq indexes continue to drop, now moving beyond 10 percent from that peak, which puts them into correction territory (it takes a 20 percent drop to be defined as a bear market).

And a few minutes following the opening bell of the NYSE on 8/24/15, the Dow lost 1089 points, which has not experienced such a steep loss since October 2008. And it will be the first time in the history of the Dow that it will have dropped a total of 1500 points in three consecutive days.

Then, on the very next day, with the futures up over 200 points, some trader (most likely) flippantly labelled it “Turnaround Tuesday” following “Black Monday.” Well, the Dow did claw its way back some 400 points during the day, only to close down over 200 points. A turnaround? It’s more like traders working the day’s volatility to make a few quick bucks. The real story was that the market smells further instability as events unfold in the real global economy, with an eye on China. So, while you are reading this blog, the gamblers might be inflating the market again, but I’ll bet on yet another lower closing. So do not expect the bulls to come charging back again, to gin up the market. Any gains will be nothing more than “hail Mary passes.” This time is different. Read the following and deal with an unsettling economic reality.

China’s Largely Opaque and Schizoid Economy

China accounts for 15 percent of global output and close to half its growth, so when its economy starts looking like an unraveling yo-yo, it’s a real scary thing. When they sneeze, the world catches a cold. While China’s withering economy and its devaluation of the Yuan may have been the catalyst for the bears lumbering out around the world, these bears also know that China manipulates its economy which might very well be growing at only half the rate they claim. Their long term strategy to shift from a manufacturing- to a consumption-driven economy is just that, a long and complex reshaping of millions of moving parts, particularly tough in a culture that favors saving over spending. In the meantime, the global stock market’s retreat has been exacerbated by a measure of China’s manufacturing activity, which was reported it at its lowest level in six years.

The day following the crash, China did rush to lower interest rates and reduce the reserve requirements of its big state-owned banks. In turn, the theory is that the banks will loosen credit to juice consumption growth. One of the real risks is that the banks will seek low hanging and more profitable short-term fruit, which is the target of real estate or manufacturing investment opportunities, both of which are already in way over-capacity mode. This works against the government’s long-term goal of shifting to a consumption economy.

Elsewhere around the world, China’s emerging BRICS brethren (Brazil, Russia, India and South Africa) are also stuck in the mud. Europe is still just slogging along, and Japan slips in and out of deflation hell on a regular basis.

China Was Just the Catalyst

The Real USA Economy Is Ugly

During the historic bull market run of the past six years, anybody with a modicum of brainpower knew it was not an accurate gauge of the health of the real U.S. economy. It was simply the result of \”casino\” oriented traders betting with free money (ultimately insured by taxpayers), on expectations of infinite growth, which of course, is impossible and unsustainable. Accordingly, the gambling frenzy drove average price-to-earnings ratios to levels that distorted reality, awarding companies valuations based on hope for the future; a future that until now, has been viewed through rose-colored glasses.

So I would say over those years we overlooked assessing the health of the real economy based on the rise of the stock market. Not this time. This stock market correction, which could very well turn into a bear market, is not just an acknowledgement of real economic conditions around the globe. I believe it is actually the harbinger of things getting worse before they get better.

This time is different.

Economic growth is at its lowest point in three decades with wages rising at the slowest pace since the 1980s. This fact flies in the face of most economists’ observations that the bigger the recession, the bigger the comeback — the old V-shaped recovery theory, steep down and steep up. Yet this has been the weakest recovery since WWII, and has only benefitted the wealthiest 1 percent. And as many economists point out, if we follow the typical eight-year cycle of recessions, we are certainly not prepared for the next one — which looks like it could be now. After creating trillions of dollars of essentially free money, and maintaining a near zero interest rate following the recession, the Fed would appear to be weaponless if another crash ensues. Of course, the supposed silver bullet of shoveling free cash into the economy under the assumption it would be used to invest in growth has sure turned out to be an erroneous bet, hasn’t it? Our casino traders used it to double down on stocks, driving the market into the stratosphere for the last six years. No real economic growth has come from this folly.

The Fed follows the Phillips Curve theory, which claims that falling unemployment pushes up prices and wages, requiring tighter credit to keep inflation in check. Unemployment has fallen, prices and wages have not increased, but the stock market did. This time is different.

Through both Bernanke’s and now Yellen’s tenure, the Fed has been consistently wrong in its projections. That’s scary. So if the Fed raises the rate in September, once again reading the wrong tea leaves, it could tip us into a recession, or worse.

Corporate Complicity

Hey, let’s not just blame the Fed and the traders for pumping air into a flat tire with no results. Our corporations are equally complicit in creating a false sense of growth, adding to the bubbles filled only with hope. Understanding that there is no real organic demand growth, cutting costs and discounting become weapons of necessity. And cost cutting is a partner to not investing in new production or services or adding to the workforce. And the cuts certainly don’t favor wage increases. Cost cutting also paves the way to acquiring growth, (M&A), but that doesn\’t necessarily add to overall economic growth. And oh yes, a correlate to this mess, productivity is way down. No money, no demand, no consumption, therefore no productivity.

At the end of the day (and I\’m getting blue in the face), add uncertainty and anxiety about a future when consumers have more than they need and are overwhelmed by even more of what they don\’t need. So what do you get?  The answer is the opposite of inflation.

The Gas Price Bonus is an Empty Tank

Now at below $40 a barrel, and with the U.S. continuing to add to the oversupply, along with Iran soon to be rolling more barrels into the global market, experts predict the price could reach lower numbers. Economists claim that the savings for consumers at the gas pumps will become what they call a “gas bonus.” They will spend these savings in other areas of the economy, thus generating growth.

“The Robin Report” proved this correlation to be false … period. The quantitative analysis of this ratio can be reviewed in the article Memo from the Grinch: The Gas Price “Bonus” is an Empty Tank. Furthermore, in this period of high anxiety, gas savings will likely remain just that: savings.

Enter From Stage Right: Donald Trump

Enter From Stage Left: Bernie Sanders

Enter the politicians from stage right and left, literally. There should be no question as to why Trump continues to lead the Republican pack and why both he and Bernie Sanders draw thousands of just-plain-folks with their anger against the government (as well as Big Money) for allowing the economic lives of most of them to be horrible, and their fear of the future if we elect more of the same-old, same- old. This is the reactionary fuel that keeps on giving us Trump in the lead and may very well turn Bernie into a serious contender. They are so convincing to so many people as saviors. And while a humble Bernie Sanders represses such an opinion of himself, The Donald seems to believe that not only is he a savior, but a deserving “King,” capable of commanding the direction of our lives and our country.  Now that is scary and dangerous.

We have all said it is impossible for either Bernie or Donald to be nominated. We are now saying, hey, not so sure, they may be contenders. This time is indeed, different.

What About Retailing?

Finally, in our own little world of retailing, is it surprising that the entire sector is barely surviving? My message, as it has been for years: bite the bullet, downsize (or right-size) into reality, and adjust to relative demand. Then you can hope to make a nice living.  Tell Wall Street to take a hike on their demands for infinite growth. Nothing is forever.

Yes, this time is different. It really is.

Kickstarter in Your Future?

The first question you might ask yourself when starting a new business is: “Am I selling something that people actually want?” This may be stating the obvious, but nowhere is this concept more true than in retail. For entrepreneurial first-time retailers, this is a huge challenge.

Alternatively, instead of making a bunch of stuff and hoping people want it, young, innovative brands are taking upfront orders and hitting minimum goals, ensuring that everything they enter into production is accounted for.

How is this possible? Smart millennial retailers are thinking differently and borrowing from the crowdfunding model pioneered by Kickstarter.

Here is how it works:

1. Creators can post an idea or project that has a finite completion period when it has to be produced.
2. The creators set goals, at different price points, that backers can ‘pledge’ to buy in advance. If the financial goal is achieved, the backers pay up, and the project moves into production.

With over $59 million already pledged, and a 24.75% success rate, can Kickstarter and its model level the playing field for new entrants into the retail industry?

I think so.

Gustin

Capitalizing on the low risk, high-level learnings of their peers over at Kickstarter, menswear retailer Gustin has taken the model and embraced it as a company. Their website screams, “Crowdsourced Fashion — Artisan quality, classic American garments at true wholesale prices.” And they claim, “We design, you back our product, we deliver.”

Gustin has built a legion of devoted followers due to the iterative changes made between product batches and their high degree of communication with customers. It doesn’t carry any physical inventory; even top selling items must be pledged for during each run, insuring a near 100% efficiency of orders to sales. This approach also lets Gustin judge consumer appetite for new product launches — a low-risk mechanism that has allowed them to quickly grow out of the denim industry with little stress.

The pitch for the consumer? Low prices for very high quality goods they have a say in creating. Gustin co-founder Steve Powell explains, “We pass along the savings to consumers. Before our crowdsourcing business model, I would charge $205 for a pair of blue jeans at a high-end retailer. Now I charge $100 and we still get the same 50% gross margin as we did before.” You don’t pay until it ships, which makes the purchase expectations for the consumer very tolerable.

The Perils of Expectations

The original poster child Kickstarter campaign for Pebble, a customizable low-cost smart watch, was an absolute smash success. Launched in 2012 with a modest but realistic goal of $100,000 to produce the first watches, they raised over $10 million from 69,000 customers. As you can imagine, for a first-time run at producing a complicated piece of hardware, going from 6,000 orders to 85,000 units created some serious delays.

The crowdfunding method is based on a high degree of transparency; get money in advance, tell them when it will ship, and execute on that delivery time.

After two months of delays, the Pebble team had to go as far as postponing a deadline altogether. This hit a crescendo when Pebble inked an exclusive deal with Best Buy, and there was a threat that the wholesale order would be delivered before original backers got their watches. This is a crazy instance where the viral quotient almost destroyed the company before it could even get product out of the door. A strange problem to have.

If I Back a Project, and It Is Acquired for $2 Billion, Do I Still Own Equity in It?

The Oculus Rift, an immersive and innovative virtual reality headset to play video games, watch movies, and be transported to an alternative reality, launch tugged at one of the fundamental grey areas of the crowdfunding model. Oculus co-founders, Palmer Luckey and John Carmack, set out to raise a modest $250,000, mostly because they believed in the project and wanted to get it into the hands of other early adopters who could help prove the use case. Instead, they blew by that amount to raise over $2.5 million. Fast forward a year later, Facebook purchased the company for $2 billion, and backers asked, “why settle just for a prototype headset when I essentially helped get the company off the ground. Where are my shares?” Crowdfunding can get complicated. Consumers pledge money for something that doesn’t exist, playing the traditional investor role for new direct-to-consumer ventures. They take on the risk by purchasing something based on the promise of what it could deliver. Kickstarter co-founder, Yancey Strickler, calls this buying into the “journey.” Whatever you call it, this unique consumer/manufacturer arrangement starts to blur the lines of ownership, expectation, and objectives. While a $300 headset prototype would be cool, owning a piece of a $5 billion company sounds a bit better.

The crowdsourcing field itself is a journey, evolving constantly as we speak. It is one of the few ideas that has come along to solve the fund poblem of supply and demand of retail. It doesn’t matter how large or small your business is, the concept of 100% sales efficiency is something to take note of … if you can manage the perils of unpredictable success.