Curb(side) Your Enthusiasm

Jim Bacos: What have you learned over the past six months about retail and where it's going?

Mark Cosby: I started in consumer products then ended up in the restaurant world with PepsiCo for 15 years, and in the last 20 some years I've been in different forms of retail and learned a lot. I think that's one of the great things when you move around a little bit, you learn a lot about what works and what doesn't work.

The last six months have been retail school on steroids, because things have moved so fast and changed so quickly. What we thought was a fact in February is not a fact today. And there have been many different changes throughout that six-month period of time. So, I think the acceleration of digital, the acceleration of a lot of related strategies, and how we deal with customers has really shifted over the course of the last few months.

Jim: What are you doing differently due to the restrictions to be able to keep selling merchandise and addressing customer needs?

Mark: Obviously, like all retail, Michaels went through a period where many of our stores were closed. We have 1200 stores, roughly 300 that were able to stay open the entire time, but 900 stores were in some form of closure throughout the course. Unlike other retailers, we weren't all open or all closed, which tended to be what other retailers did.  So we were dealing market by market and government jurisdiction by government jurisdiction around what could open and what could not.

And then we had to develop different forms of what open meant. We pushed to do curbside or buy online pick up in store. We had the buy online pick up in store capability, but we didn’t have curbside. Within a week we developed and rolled that out. For a period of time, it was our number one sales driver through the months of March, April and the early part of May. 

We had ship-from-store already in place in probably 300 stores, but by the time we were done, we had implemented it in 1000 stores to try to move through inventory. We moved fast to roll out digital capabilities, often before they were perfected. We've really been hustling to accelerate a lot of the capabilities that we thought were going to take several months, which ended up taking only several weeks. I think, with every retailer, if they didn't have a digital capability or if their digital capabilities were weak, we had to accelerate those. The challenge for Michaels was that we didn’t roll out ecommerce until 2016. We've been in a sprint over the course of the last two years to really put that in a different place.

Jim: I understand that necessity forced you to do a number of things that you were not doing previously or to accelerate things that were part of the marketing mix, but perhaps not a dominant part. Do you see that changing or do the things you did to address the crisis will stay and/or expand?

Mark: I mean, the bigger question is will this keep going and, obviously, it will. If you had a ten-year plan or a five-year plan, I think it got cut in half by this pandemic. Whether it was digital strategy, or even a lot of other elements of the business, the time frame to success had to be cut in half to make it work. And the need to be competitive in the digital space is probably even more critical now.

Michaels rolled out curbside and same-day delivery. We didn’t have that capability before but rolled it quickly out in all of our US stores. Now we’re working on enhancing the experience from a customer perspective so that it continues to evolve and improve.

Jim: And what do you observe about the economics of doing this type of order fulfilment, rather than the traditional instore experience?

Mark: It’s significantly more expensive. Most retailers don't make much money on a product if it’s distributed out of distribution centers. Ecommerce out of a distribution center is a break even or slightly better proposition. The place where you can make money as a retailer is buy online and pick up instore.

Over the course of the last year and a half, I think most retailers have seen a dramatic acceleration in the comfort of customers going online to order what they want and going to the store to pick that up. When most retailers rolled it out three, four, or five years ago – it didn’t take off. Now it’s a huge core of the business and an important element of being able to economically make the whole ecommerce solution work. 

Jim: You don't see direct home delivery of something that would become a significant or attractive part of your mix over the next few years?

Mark: We do. I think it's one of those things you just have to do nowadays if you want to be relevant from a consumer’s perspective. You have to be there any way they want to shop. We are making those things available. I think a big benefit in the case of Michaels is that a lot of people do appreciate the buy-online, pick-up-instore solution. There are a lot of customers that will choose that as the way they want to go, so our shipping mix is less than that of some retailers.

We see all elements of the digital space growing, and we believe we must be relevant in all forms. For example, we didn’t have same-day delivery until about two months ago and now it’s available in 1,000 stores. It wasn’t even on the radar screen a year ago.

Jim: If we look at the more traditional perspective of a retailer having stores, what do you think the role of the store is going to be? Has it changed and will the role of stores go back to the way it was when things go back to normal?

Mark: I think it's going to evolve. I still think it’s important to our future for a lot of reasons. First and foremost, it's a differentiation versus our competitors. The pure online players who compete with us that don't have stores are disadvantaged. They can get it to the customer on the same day, but at a much bigger cost than we can because we have the 1,200 stores.

When the pandemic hit, we only had 300 stores open. Most of our sales were going through our ecommerce channels. Last year four percent our sales went through ecommerce.  We moved the mix up in February before the pandemic hit, and then online was dominant from a sales perspective in March, April, and the early part of May. The big question was where would the ecommerce mix settle when stores reopened. Today, it's significantly higher than where it was, even now that all of our stores are open.

Bottom line, stores must be a big player. They are still going to be a dominant piece of our mix, as stores are where we make the money and where we differentiate. But I think the digital piece is also going to continue to grow.

Jim: What have you observed about the retailers who have managed this crisis versus those who did not?

Mark: We had to cut down the expenses and the cash that was going out. We worked with our vendors and real estate organizations. We had to furlough staff, cut expenses, cut capital expenses - we did everything we could to make sure that we came out of this financially strong. I’m not sure everybody jumped on that as fast as they could have.

We had just rolled out a big strategy this past year where we reoriented towards our core customer and away from the broad customer base. And we had shifted to more of a content, experiential strategy. That was intended to roll out in March, April of this year, and it was perfect timing, because we started talking about experiences, content, how to make product, and how to be an expert in crafting at the same time people wanted to know about it. I think we kept all of our initiatives moving forward, some of which were digital, some of which were things like a new prototype store, a loyalty program, a pricing initiative. I think it was smart that we kept all of those things moving so we’re positioned when we come out of the pandemic to win.

And then I think the third thing is that we accelerated a lot of our ecommerce capabilities. We rolled out capabilities such as curbside delivery, that were not perfect, but were a big benefit for our customers. And I think that helped us get through it.

If you wanted to add a fourth factor, I think crafting is pretty relevant right now. There are businesses that are doing really well right now because it fits with the consumer mindset in this pandemic time. And there are businesses that aren't doing well because it's sort of irrelevant during this time.

We've come through this much better than most retailers, and we feel like when this is over that we will be in an even better place.

Jim: We said in our Retail’s Revolution report that in five to ten years there's going to be a major shift in the retailer landscape. There is going to be a number of a pure-play online retailers and new forms of addressing and keeping customers. Because of the pandemic, do you see this shift happening much sooner?

Mark: I don't know if it will happen by the end of the year, but if companies were weak and not well positioned coming into the pandemic, I do think that it will accelerate the process. You’re seeing it in the mall space. There were too many places to get apparel, so you’re going to see that whole space will be challenged over the next few years. But if you were weak coming into the pandemic, I think it forced it.

But not just digital capabilities had to accelerate. A lot of things had to move forward quickly, including strategies and long-term positioning, org structures, marketing strategies, and asset plans. 

I think even healthy companies are rethinking asset plans. But the struggling companies coming into the pandemic are now accelerating their plans which is why they are talking about store closures and getting down to their core number of stores. Marketing strategies will change significantly through this. In our space, pure price discount isn’t as important and it’s more about experience and leveraging the store.

You're already seeing a lot of the fallout and it will likely accelerate by the end of the year. The pandemic made weaknesses more profound and will force action. 

Jim: And when these companies go, do you see them being taken over by private equity, changed and rejuvenated or do you think they're just gone?

Mark:  I would say that retail will still have a huge future role. We've even watched it in our results. We thought digital was going to take over and have a much higher percentage of the mix when our stores reopened. And we thought digital would be growing faster, but people returned back to their buying habits. There still is a huge space for retail and for stores. I think it's a differentiating strength, but it can't just be a bunch of product on sale. It has to be an experience.

There will be retailers a year from now, there will be retailers two years from now. I just think it'll be in a different form – some players that will go out for sure, some will come back in a different state, and some new ones will pop up.

Jim: What do you see as the role of the Associate in the store? Especially since we don't know how long this is going to go on, will we change the form in which people interact with the store itself physically? Will it be more machine-oriented, will it be less people-oriented? How do you see that playing out?

Mark: For Michaels and a lot of other retailers, the strength is the fact that you have this team in the stores who can help and assist customers. In our business of crafting in particular, people want help. I think that is a strength that we will really play up in a bigger way. But at the same time, we also know that we have to make it easier for customers, so solutions such as curbside pickup where people don’t even come into the store have become important. We're looking at things like “shop and scan” where a customer doesn't even have to wait in line. They come in, use their phone, scan the item, you check them at the door, and they walk right out.

I think we're preparing for the customer that doesn't want to interact with us and really make it easy, whether it's online or in store, but for most retail, if there’s not some experiential assistance from an associate, then I think it will be tough to prosper in the years ahead.

Jim: What do you think the societal impact a decline in bricks-and-mortar retail could have, including the disappearance of iconic names who employ a lot of people? Do you see it coming back or do you see a long-term decline in terms of people?

Mark: That's the tough part when you go through a crisis like this, and it’s one of the things we struggled with. We had a lot of people not working. So getting back, being open, and being able to provide a service to our customers was also a good thing for our associates as well.

I don’t happen to think retail is going out. I think it’s more challenged, and it’s certainly a much more difficult space to be in than it was five years ago. The retail world has shifted dramatically, so where I spend my time now versus five years ago has changed.  But I do think retail comes out of this. There have been hundreds of brand names that have fallen out over the years and been replaced by other brands and that will continue.

Customers want to shop in a store. They want options. They want alternatives. I think retail will prosper, but it can't be just product at a price with stuff all over the place. It has to be more of an experience, particularly in specialty retail, like Michaels.

Jim: If you're running a major retailer today, what are the key strategic questions that you think the CEO needs to be asking and answering not only to survive, but to thrive? 

Mark: I think the big one is who is your competition, and how are you going to differentiate? And the answer to that question has changed a lot over the last five years if you’re a CEO in the retail world. You would have typically thought about your direct box competitor, because there generally were two or three of those in every space. But you know what's happened is most players have fallen out and there is now usually one big player, maybe two players in the space and the rest of the business is in the ecommerce world.

If you're in retail today, you must have a differentiated strategy versus players who are pure play ecommerce businesses such as Amazon. And what that generally entails is getting product to customers in different forms, different ways. How do you provide them with an experience? How do you ensure that your associates are an advantage to customers? And how do you display product in different ways to make it more compelling, so it’s easier to shop instead of just going online to do it?

I think that's the big thing. Really defining who is your customer, how do you win with that customer, and how do you differentiate in the space versus the other competitors. I think in most segments there is an answer to those questions. And if companies move fast enough, they can win. But it’s not the same formula that won five years ago. So it’s not build a bunch of stores and they will come or stack it high and watch it fly – it needs to be much more about experience and how do you optimize your asset and connect it with the omni channel world to win.

Jim: In a market environment like this, what is the shelf life of a strategy?

Mark: I would have said it was five to seven years before COVID-19. I think the targeting of the customer, who is your customer, how do you differentiate – those answers probably are generally still the same and last for five to seven years. But I think the actions and the tactics and the priorities that live underneath the strategy have to move faster. And this pandemic really forced that. It obviously forced it in digital ways, but I think it forced a lot of things to move faster from assortment to asset strategy. The strategy, the core customer focus, how you are positioned, and how you win can last, but the priorities underneath that have to shift pretty quickly in response to customer needs.

Jim: What has Michaels done re. your pricing strategy?

Mark: When I took on this role two years ago, one of the smart things we did was take on the new strategy work to define our core customer and the resulting priorities. A big priority coming out of that strategy work was to optimize how we price. We brought in Oliver Wyman early to help us.

Michaels is an extreme high low player.  We knew we needed to stay as a high low player, but we had an opportunity to optimize how we execute our high low pricing. We started out working on our discount and promo strategy. We defined the promo types that work and those that do not. And we’ve seen good benefits both in terms of sales and margin benefits that will help us fund our key initiatives and provide more value to our customers. We also received a lot of benefit from looking at how we price in the digital ecommerce space, because that's a different formula than how you do it in the stores. And, of course, there needs to be a relationship between the store and ecommerce pricing. We are also starting to work on zone pricing. We were one price across the whole company, which in many ways is archaic in the retail world.

We really pushed personalization and leveraging our CRM capabilities to provide value to customers based on their spending history.  And, we have a loyalty program coming this Summer. The final step is to look at our shelf pricing versus our competitors. A big part of our core customer focused strategy is to optimize our overall pricing strategy………from how we promote, to our digital pricing to our shelf pricing. And I think that's another place that we've had to accelerate over the course of the last several weeks. One of things I feel most fortunate about is that we had the work already underway coming into this pandemic and the work will help ensure that we prosper on the other end of it.

Jim: To follow up on the pricing topic, do you see a change in the role of promotion?

Mark: Promotions have definitely changed for us in the middle of this pandemic as we haven’t had to promote as aggressively through this period of time. And part of it is because we’re in a hot category. We provide a service to customers, and there isn’t a lot of competition in this space. We’ve been able to get off the high low pricing a little bit. We also had a chance to address some very aggressive store discounting where our stores had too much flexibility to change prices or match competitors discounting programs.

I do think it's a window where if you move fast, you can take some action on the pricing front and end up in a better place coming out of the pandemic.

That is why we have pretty significantly changed our promotion strategies through this pandemic and, hopefully, there's some lasting benefits that will come out of that on the other side. But we haven't just done it without support or without analytics. We've been really going through the assessment of what's working and what's not working. And as a result, we feel like we are making a lot of progress on the pricing front.

Mark Cosby, CEO at Michaels Inc  –  An experienced consumer goods and retail executive with deep operations expertise. Throughout his career, Mark has demonstrated a consistent track record of improving operating performance across a broad range of leadership roles with Fortune 100 companies.