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Feb 28, 2017

Why So Many Stores Are Closing: The Changing Face of Loyalty

By Shawn Gold, Republished from Total Retail Magazine

Once, location trumped nearly everything else in retail. Growing up in the 1980’s, I was loyal to my local Macy’s Store in the Brunswick Square Mall where I grew up in New Jersey. Back then, success lay in creating loyal customers who lived close enough to regularly patronize your store, often with heavy local advertising to generate regular foot traffic.

Maybe you visited a favorite in the local mall because you liked their clothes or prices or salespeople. Maybe you grew up shopping with your mother in a big department store. Or maybe you just liked the mall Santa. Those experiences brought many customers back year after year.

But that’s all changing.

Just in the past few weeks, The Limited said it would close all 250 stores; Sears is closing 150 more (after closing 278 in the past two years); JC Penny is closing up to 140 stores and Macy’s is closing 68 and cutting 10,000 jobs.

Meanwhile, online retailers are expanding aggressively. Amazon is adding 100,000 full-time U.S. jobs. And while it’s huge, Amazon has 37 percent of the online retail market. Lots of others are growing fast too, and they’re building customer connections in powerful new ways.

Chinese people, young people, they don’t go shopping a lot in department stores. All department store guys hate me. They say business is bad because of Jack. – Jack Ma, Founder Alibaba

Loyalty these days is built with selection, price, convenience and service, along with some kind of exclusive product unavailable elsewhere. The goods can be delivered, especially to younger shoppers, without operating a physical store.

In an Internet-enabled world, price is pushed down from several directions: more competition/pricing information; broader reach/potential markets; and the ability to eliminate many bottlenecks in design, production, marketing and logistics.

With those bigger potential markets, you can scale up the selections you provide customers, and amortize your investments in service and support. And convenience can mean many things, providing customers with 24-hour access and deep information, on any device, to all the potential offerings a store has.

And because shoppers have access to the same or similar goods from potentially many companies, providing exclusives is a crucial differentiator in attracting and keeping customers.

These are powerful new capabilities for any retailer to harness, and provide enormously valuable benefits to customers as well.

But the real secret weapon on building loyalty online may be membership. Pay a monthly or annual subscription and the company will give you access to special deals, services and opportunities. In turn, you’re more likely to shop there for other things too.

Companies built on a subscription commerce model are creating a new kind of deep customer relationship, with optimized production and logistics and a rich understanding of their subscribers’ needs.

The subscription commerce model is upending decades of business practices, fueling rapid growth and building deep loyalty with a new generation of shoppers who have fewer reasons than ever to step into a physical store.

Here’s ominous news for traditional retailers. Not only does the online membership approach provide many immediate benefits for customers and companies, it’s also changing the loyalty equation. If you had never walked into a Macy’s store before, are you more or less likely to choose that as your first option today?

Costco was a pioneer of the membership approach, and continues to sell billions of dollars of goods every year to an ardent following. With every visit, Costco’s loyal members embark on a journey of discovery through aisles of specials and one-time deals, along with all the staples they need to get.

Now more online companies are structuring their businesses the same way, using technology to empower scale, reach and deep data while moving beyond the limits of physical location.

Amazon Prime – originally a way to get free two-day shipping for frequent shoppers – now offers free e-books, streaming video and music, early access to deals and more for $99. And it helps Amazon sell a lot of goods. The company doesn’t release numbers, but analysts estimate it has more than 54 million Prime subscribers.

TechStyle now has more than 4 million members to its four brands paying upwards of $49.99 a month for constantly refreshed collections of clothes, athletic wear, shoes, accessories and kids wear. The company is one of the fastest growing fashion companies in a time when fashion retail is stagnant.

Dollar Shave Club, which sold for $1 billion in 2016 to Unilever, started in 2011. By the time it sold five years later, the company had a reported 15 percent of the market for razor blades (though only 5 percent of sales, because its blades are much less expensive).

So why does membership matter? Because it changes the relationship between the customer and the company.

With a membership structure, a company already knows who its customers are, and knows what a specific customer is most likely to buy. That helps focus and improve the shopping experience in several important ways.

It ensures the company offers products more likely to appeal to its customer base. It can more reliably adjust such key variables as sizing and styles. That means less waste, reducing costs for production, shipping and inventory.

A membership-based company spends far less on marketing and advertising, because it doesn’t have to constantly reacquire its customers. Typical retailers must advertise heavily to keep pulling in potential customers, a major portion of expenses.

By contrast, a subscription company is merely continuing its ongoing conversation with customers who already are happily paying for its products. Membership creates a mental marker that encourages shoppers to do their business where they already have a relationship.

That brings us back to loyalty. Where location and physical convenience were once drivers of loyalty, now it’s a membership experience that brings customers what they want wherever they are, all through an unified experience that now may even involve physical stores (both Amazon and TechStyle’s Fabletics have brick-and-mortar outlets).

Yes, some traditional retailers are seeing nice growth rates for their online operations, though much of the traffic typically is from long-time customers. What they’re getting less of are the young shoppers now bonding with membership commerce companies they already know, and which deliver what they want, at a good price and with unparalleled convenience. That’s the future of retail.

Shawn Gold is the corporate marketing officer at TechStyle Fashion Group, the parent company of Fabletics, JustFab, FabKids and ShoeDazzle.