Mickey Drexler And The De-Schlepping Of Retail
Millard “Mickey” Drexler, the former CEO of J. Crew Group and Gap, is many things. Shy and retiring is not among them. To be sure, Drexler’s had his ups and downs, his victories and defeats. But he’s always interesting. In my only conversation with him (by phone when I was a responsible for strategy and multi-channel marketing at the Neiman Marcus Group), he had the attention span of a gnat on a 5 Hour Energy bender. Between barking orders to his assistant, he dictated a litany of things we were doing wrong at Neiman’s that I must address STAT (wait, do I work for you?). I left the call with a long list of items to discuss with my boss, more than ready for a nap. Good times.
Drexler has been mostly off the radar since stepping down from J. Crew, yet he re-emerged in typical style at last week’s Annual Retail Forum/Retail Radicals event organized by the Columbia Business School and The Robin Report. Among his many provocative comments, the one that captured my attention was what he referred to as the de-schlepping of retail. “Why schlep paper towels from the supermarket? Why schlep dog food? Why schlep a lot of things?” he asked. And he’s right. Of course lugging heavy and/or bulky items home from a store has always been a hassle, particularly if you take public transportation or live in an apartment. The more powerful change is the number of companies that have emerged to address this pain point, including Boxed, Jet and Amazon.
I (and others) have made the distinction between buying and shopping, highlighting the fact that e-commerce is rapidly gaining share in the former, where the products are more commodity-driven and where price and convenience are paramount. Shopping, on the other hand, is more experiential and tactile, and as such, pure online shopping has not gained nearly as much traction. De-schlepping, as Drexler describes it, solves a very particular sub-set of customer needs, delivering clear and obvious value. From my own experience, once I discovered the ease of buying bulky and heavy items online, I haven’t turned back. While it’s not a huge amount of purchases, I’ve made a nearly complete shift of spending in certain categories away from traditional grocery stores to Amazon and others. It’s clear from the data that I am far from alone.
At one level this dynamic is pretty obvious. At its core it merely explains some of the fundamental reasons that online shopping is now approaching 10% of all retail sales and continuing to grow much faster than brick-and-mortar retail. What’s relatively different about the de-schlepping phenomenon, however, is both the customer value and the underlying economics for the retailer.
There are plenty of retail categories where the customer may be largely indifferent between buying in a store or online—or where they regularly split their spending between the channels, based upon their episodic need for sales help, the desire to touch and feel the product or pure impulse. This is not true when we are motivated principally by our desire for de-schlepping. Once we know what we want and have a supplier we trust, there really is no reason not to buy online as a physical store experience adds little or no discernible value.
Yet from a retailer’s perspective, it’s often rather different. Since brick and mortar is largely a fixed cost business, the marginal profitability of a big bag of dog food or 48-pack of toilet paper or a case of S. Pellegrino sparkling water (my personal favorite) is usually good, even when heavily discounted. Conversely, for the online players the economics are generally terrible, owing to the variable cost nature of direct-to-consumer sales. The precise reasons customers love the de-schlepping of retail is why e-commerce sellers generally hate it. If it’s big, bulky and heavy, it costs a lot to store, handle and ship. The logistics costs relative to the gross margin dollars generated typically make these orders unprofitable. What’s great for consumers is lousy for online retailers.
So the question isn’t whether the de-schlepping of retail is good for consumers. The question is whether it can be economically sustained as it scales. The nature of Amazon’s Prime program means a decent percentage of the e-commerce behemoth’s orders are unprofitable. The prevalence of free-shipping and deep discounts to acquire new customers means that some online-only players have many transactions that generate negative cash flow. Ultimately it comes back to the interplay of unit economics and customer lifetime value. Most customers are smart enough to go where they will get the best deal. They will “overuse” retailers (online or offline) that consistently provide customer value that is too good to be true (see also Uber, Lyft and WeWork). In Amazon’s case, it has the benefit of comparatively low customer acquisition cost, supply chain efficiency and offering such a wide array of product and services that the vast majority of customers have good lifetime value even if it has a smattering of transactions that are money losers.
For brands that offer great customer value, yet suffer from challenging delivery economics and high customer acquisition costs (Boxed, Wayfair, among others), the path forward is far less certain. Sure it’s impressive to deliver consistently strong revenue growth. Yet it turns out it’s really not all that surprising when the service offering and pricing may be too good to be true. For consumers it’s great when investors are willing to subsidize a new business model that offers real customer utility. Whether that business model is ultimately economically sustainable is another matter entirely. Time will tell. In the meantime, as long as certain brands are willing to price in such a way that I can avoid the hassle of schlepping home the biggest and bulkiest of items I regularly purchase, I’ll keep buying. I’ll let them worry about whether they can sell at a loss and make it up on volume.