Why Are Retailers Still Fumbling Despite Higher Spending?

By many accounts this should have been a good spring for retailers, who were supposed to have the wind at their backs in terms of higher consumer spending. Now that the numbers for April are in and revised, it seems like consumers did spend quite a bit more than this time last year, which begs the question of why, then, are most retailers disappointed when they reported their earnings for the quarter?

Part of the problem is their ongoing inefficiency as most retailers are still stuck in a cycle where excess inventory forces them to offer promotions and sales which cut into profits. However, a major part of the problem is they've become imprecise about the way they seek out growth. Here's how they can get themselves back on track:

Invest more in human capital

The sales model that most big-shop retailers still use to get customers into the store is broken. You shake hands with the devil when you allow your customers to buy one, get one free; the customers get trained to expect these incentives. This even happens to savvy consumers who are invested in quality, with options like Net-a-Porter, they have all but stopped paying full-price in traditional department stores. Instead of relying on the same old tactics, big retailers like Macy's, J.C Penney's, and Kohl's need to find more innovative ways of bringing in customers. One option might be to follow Target's lead and invest more in sales associates and merchants by raising wages. This is expensive in the short term, but a well-trained, more experienced workforce is better able to cater to customers and, perhaps crucially, more likely to create a relationship with them that keeps them coming back to the store.

Target brands and regions that value innovation

One of the major bright spots in retail has been in London, where the world's largest brands continue to invest in expensive new flagships. Ralph Lauren, Michael Kors, and Kate Spade all recently announced or updated plans for new retail space in the city. Part of this has to do with the fact that the United Kingdom, along with Germany and Scandinavia, remain pockets in Europe where spending is still strong. However the other lure of these regions is that they are still producing innovation. Too many growing companies think of expansion in purely a regional sense, which is really backwards. You should find the right partners and then court them irrespective of where they are based.

Weigh regional preferences

Brands and retailers should also invest more in research and resources that better allow them to cater to regional preferences. Regional distinctions show appreciation and empathy for different players on the ground, but most retailers don't have the systems to do it well. One example of this dissonance is China, where many brands failed to anticipate the Chinese appetite for luxury brands and the sophistication of Chinese shoppers. That's increasingly becoming an expensive mistake to make, as China is now the largest luxury market in the world with highly discerning customers. Tellingly, close to half of Chinese customers no longer factor in the logo when choosing designer pieces, a sharp departure from ten years ago, where celebrity endorsements and American names were thought to convey status. Brands and retailers who don't find new ways to stay on top of regional preferences will continue to struggle.

Control costs through careful partnerships

Brands also need to be more methodical in terms of pursuing the right partnerships. Recent revelations about the fraud in influencer marketing aside, partnerships can have unintended consequences that can harm brand equity down the line. One particularly famous example involves the apparel giant Calvin Klein, which partnered with Warnaco on a major swim-line featuring Brooke Shields. Despite increasing sales for the two companies six-fold, the partnership ended in enmity over wide-spread knockoffs and a prolonged legal battle. Faulty partnerships can be even more disastrous for retailers, long-term leases can be incredibly hard and costly to get out of. One of the major problems facing Macy's today continues to be an overabundance of retail space that has become costly to maintain.

As retailers continue to contend with pressure from e-commerce, they will invariably seek out growth in other markets. However this must be approached with greater discipline than it has been approached in an America that was defined by shopping in malls. They also need to reinvest in their own shopping experience before they can expect to win over international customers. Better sales associates, merchants, and in-store experiences are a start. Lastly, they must find the right regional partners to help them adapt to preferences and aid with distribution. The right mix of investment will reward shoppers, and Wall Street shareholders, alike.