Askeladden’s Q4 2017 investor letter is now available here.
In which I restrain myself from making pointless football metaphors for the pure joy of it.
Over the past 1.5 centuries, what has led to dominance or failure in American retail, and what takeaways should investors and managers draw from that history? Here are the ten lessons I learned.
This paper is based primarily on my analysis of five books, four of which I’ve read twice, about four category-killer retailers that have functionally dominated their category for a cumulative total of 150 years or so: The Great A&P by Marc Levinson, Made in America by Sam Walton, The Everything Store by Brad Stone, and Pour Your Heart Into It as well as Onward by Howard Schultz of Starbucks*. Additional context is drawn from books and information about other successful retailers, listed at the end**.
Note that one challenge with the sort of methodology I’m using is that stories can often be misleading if read improperly – an issue I address extensively in a companion paper, “Countering Cute Storytelling,” which is probably more useful than this one (if you only have time to read one). Consider my observations there to be an input as well as a caveat to my commentary here.
Without further ado, here are the loosely organized Ten Commandments of American Retail:
Few retail behemoths are founded on unique ideas, and while they do often innovate plenty of things along the way, sometimes their best “edge” is simply doing what other people are already doing – just better. Amazon wasn’t the first online bookseller. Starbucks would have languished forever as a local, low-margin roaster of whole coffee beans if Howard Schultz hadn’t fallen in love with the Italian espresso bar experience and decided to port it stateside. Sam Walton was described by many as a “master of taking the best out of everything and adapting it to his own needs,” borrowing concepts ranging from self-service and metal shelving to ripping off Sol Price’s warehouse club concept. Costco’s own Jim Sinegal once told Jeff Bezos that “we have shamelessly stolen any good ideas.”
If you’re not building on the shoulders of giants, you’ll never reach the sky.
You can’t win an arms race – you need something proprietary.
The phenomenon described above works both ways – just as you can steal other people’s ideas, so too can they steal yours. Playing the me-too game is necessary but not sufficient for success; you need to offer something unique. As discussed in Shoe Dog, Nike wouldn’t have become what it is today (or perhaps even existed at all) if it had continued just being a distribution front for Japanese shoes (other people figured out that game pretty quickly, and threatened to disintermediate them).
Sources of moat can include (the more the better):
- proprietary product (Starbucks Frappuccinos, The Container Store’s ‘elfa’ line, Amazon’s “long tail” and used-good availability via Marketplace, Apple stores)
- unparalleled customer support (Amazon, Zappos, Container Store)
- unparalleled convenience (I would argue Amazon wins on this front more than price, especially with Prime)
- low prices driven by an unbeatable cost structure or different business model, and perhaps vertical integration in some aspect of the business like product or distribution/logistics (Costco, Wal-Mart, Great A&P, IKEA… maybe Amazon?)
The current death of undifferentiated mall-based retailers hawking other people’s commoditized merchandise is not a new story, but merely the next in a long line of retail death: it started with mom-and-pop grocery and variety stores in the late 1800s, and on and on and on…
Customer relationships matter, and therefore so do your front-line employees (probably).
It’s hard to win customer loyalty and easy to lose it; non-customer-focused retailers uniformly died while all of those that survived focused on the customer (again, it’s necessary but not sufficient for success.) The corollary to this is that customer interactions are often critical to get right; for businesses with a physical presence, this means that investing a little higher wage to put forth a better, more motivated associate is probably worthwhile (this was the classic Wal-Mart philosophy, and apparently one they are now re-learning.) Starbucks, The Container Store, Zappos, The Home Depot, and others have all in some way taken this approach. Moreover, in Schultz’s Onward, one of the core points is that by the mid-2000s, Starbucks was more focused on comps than customers – and they suffered for it.
Amazon is perhaps the notable exception; its “front-line” employees (in the warehouse, shipping packages) may or may not be treated well (it is an open question), but the customer relationship is maintained via algorithms, personalization, and Bezos’s top-down ultimatum that customers not walk away unhappy.
Adapt to your customers; don’t expect them to adapt to you.
As Arthur Blank puts it on page 237 of Built From Scratch, “[Home Depot] learned that the consumer dictates who we must be, what we must be, what our content must be, and what services we must give them.”
Retail is not the right industry for purists. The Starbucks of today is perhaps best known for frilly, ridiculously customized drinks (double-pump hazelnut cappuccino with soy milk and stiff foam, exactly 197 degrees) but there was a time when the company had a bitter internal debate about whether or not to offer non-fat milk because it violated the Italian coffee experience and the purity of their dark roast. The company eventually realized it needed to be what its customers wanted it to be, not a carbon-copy replica of some mythological Italian ideal, and now adapts to local markets (offering flavors like Black Sesame in China, for example).
Similarly, when Wal-Mart tried to literally copy West-Coast Fed-Mart warehouse clubs into the Midwest, they found out that Midwesterners don’t quite like wine as much as Californians (similarly, they found that Southern treat “Moon Pies” didn’t sell so well in Wisconsin.) Notably, even the notoriously arrogant Apple was forced to capitulate on the issue of screen sizes, as consumers threatened to vote with their wallets and purchase Android phones that were superior on that dimension – one valued by customers, but not by Apple.
If you don’t cannibalize yourself, somebody else will.
“There are no annuities in this business.” – Jim Sinegal
“It’s easier to invent the future than to predict it.” – Alan Kay, via Jeff Bezos
If you think today’s disruption is bad, try the freaking 1890s – 1940s. While retailers today can at least define their existential threat with one of two words (i.e. Amazon/e-commerce), retailers in that 50-year period faced an unprecedented deluge of technological innovations, macro circumstances, and shifting consumer preferences that seemed to upend their business faster than they could say “corporate strategy” – think transcontinental railroad, the automobile, suburbanization, refrigeration, the Robinson-Patman Act, and two World Wars, just to start with.
The Great Atlantic & Pacific Tea Company succeeded under the Hartford brothers’ lead for so long not due to one monolithic strategy (other than focusing on low margins / low price for most of their history), but rather by consistently evolving: from shopping palaces with lavish “trading stamp” premiums to no-frills low-price stores to supermarkets to even bigger supermarkets, everything from the store format to the service format changed. Often, stores became obsolete within a few years of being built, but the Hartfords displayed unusual willingness to ignore sunk costs and rip them to shreds and rebuild if that was what was required.
While no other retailer has perhaps had to face the breadth of challenges that A&P did, other successful retail magnates took the same tack – Sam Walton made it his personal mission to ensure constant change was part of the Wal-Mart culture, and Jeff Bezos fought hard against the “institutional no” as Amazon scaled, which resulted in the creation of wholly new businesses like AWS. In particular, Bezos gave the Kindle team not just license, but encouragement, to disrupt their own physical-book business. In contrast, Borders and Barnes & Noble, wedded to their legacy business models, failed to adapt quickly enough to the new era. One perished, and the other now faces existential threat and seems unlikely to recover anything resembling its former glory. Historically, there are so many retailers in this category (Montgomery Ward, J.C. Penney, Woolworth’s, Sears…) that you could spend a day naming them all.
“Founder-led” seems to be the way to go – maintaining culture in the absence of a guiding light is hard.
In light of the above, principal-agent issues are very real when it comes to retailers – even with the Hartfords as the only meaningful stakeholders of The Great A&P, they faced resistance from local managers for whom tearing up existing stores to build new, unproven ones was a negative.
Indeed, to surmount this local-vs-global optimization problem – i.e., that agents are usually incentivized, both in terms of status and money, to maintain their position atop the local hill rather than facing the challenging trek down through a valley to reach the mountaintop where you need to get to – it seems to pay to have a strong principal atop the business. Otherwise, there’s no champion for optically bad / operationally disruptive measures that are critical to long-term success. Oftentimes, businesses can even become “locked in” to a certain way of doing things, and their business model / “institutional imperatives” constrain them from fully targeting new markets in new ways, as discussed extensively in The Innovator’s Dilemma by Clayton Christensen.
Howard Schultz saw this problem at Starbucks once he left – rather than his bottom-up “one customer, one cup” focus, the organization’s focus shifted to top-down aggregate numbers like comps, number of stores, etc, and Starbucks lost its way, driven by Wall Street comp expectations rather than a focus on the customer and the barista. John Hartford was in stores and on the road all the time, and A&P quickly fell from grace after he and his brother passed away.
Meanwhile, Jeff Bezos has a public email address and, with the help of his assistants, reads all customer emails sent to him, escalating some to the customer service team with an ominous “?” Sam Walton liked to sit down with truckers and associates to get a ground-up view of the business. One wonders if Wal-Mart would have mounted an earlier and more effective e-commerce initiative if Sam Walton had still been alive to watch Amazon grow.
Success in retail seems to require a strong, motivated principal maintaining the culture and focus. It is notable, I think, that there seem to be few world-class retailers not run by “founders.” I put that in airquotes because Tony Hsieh, Howard Schultz, and the Hartford Brothers,for example, weren’t technically the founders of their respective businesses… but they were close enough and certainly weren’t free-agent managers.
No retail empire is without its share of failures. Starbucks had plenty of failed products like Sorbetto and Mazagran, as well as a poorly-considered mid-2000s foray into entertainment somewhat reminiscent of what sent Six Flags into bankruptcy. Amazon’s entry into categories like jewelry yielded far less payoff than originally expected, and its attempt to compete with eBay in auctions essentially failed entirely (though it did sort of transform into the company’s hugely successful Marketplace third-party platform).
The key seems to be a willingness to try new things and tolerate failure – Sam Walton noted he had a strong expectation that he would win, but also a willingness to shake off mistakes along the way – but to not be stubborn and take a “my way or the highway” approach.
Tech titans Peter Thiel and Marc Benioff both point out that marketing matters – you can have a good product, but it isn’t necessarily going to sell itself. The Great A&P launched itself into the public consciousness with blatantly false ads (we’ll save the ethics lecture for another time). Far from the staid image it has in present times, Wal-Mart of the ‘50s and ‘60s had entertainment ranging from donkey rides to popcorn/ice cream machines to pie-eating contests, and stunts like literal pyramids of toothpaste or giant displays of womens’ panties at fire-sale prices. Starbucks often collaborated with Kenny G in the early days, and after a slow opening in Chicago, focused on promoting openings in new markets. The Container Store similarly created pre-launch buzz at its stores. Even after two decades, when Starbucks launched VIA instant coffee, it created buzz by getting reporters/analysts to drink what they thought was conventionally-brewed coffee but turned out to be VIA (which grabbed a lot of headlines).
A “land grab” may be necessary… but scaling isn’t trivial.
Many of the retailers seemed to have a Get Big Fast mantra – given the “cloning” issue discussed above, as well as the benefits of scale for cost structure, branding, and supplier negotiating power, it seems like in many cases, growing faster than is advisable is usually advisable. First mover advantages are limited – indeed, remember that most great retailers were not truly first movers in a category. The Great A&P, Wal-Mart, Amazon, and Starbucks all expanded at a breakneck pace and managed to outrun imitators.
However, scale brings problems: corporate culture doesn’t work the same way when you don’t know everyone’s name and everyone’s spread out across the country. These transitions can often prove to be a stumbling block.
You either die a hero, or live long enough to see yourself become the villain.
We Americans love underdogs – until the underdog puts everyone on the mat and becomes the reigning champion. Every retailer that grows really large (A&P, Wal-Mart, Amazon, Starbucks all faced this) eventually become a lightning-rod for criticism by populists and politicians alike, whether or not it is deserved – South Park’s “Gnomes” (S02E17) has a witty take on this. This phenomenon can often result in challenges ranging from employee morale to executive distraction to political pressure (as A&P found out for seemingly two decades).
On the other hand, long-gone small-town mom-and-pop shops are immortalized as Ellie Walker’s drugstore in Mayberry (Andy Griffith, S01E04) – a friendly place with a friendly face where little Opie can get an ice cream, maybe even for free. Reality is vastly different, of course – the reason small-town shops died is because they had high prices, poor selection, and often poor quality merchandise – but don’t let the facts get in the way of the argument! (Note: I almost solely patronize indie coffee shops, but only because they’re way better than SBUX.)
Bonus: Everyone has blind spots.
Not strong enough to be a commandment… but the Hartfords didn’t realize for a shockingly long time how real the political threats facing A&P were; Starbucks had woefully underinvested in supply chain and technology because they were so focused on the front-end experience vs. the back-office, and Bezos whiffed on the music category (letting Apple get a big early lead) because he was a big reader and not a big music guy.
I don’t actually invest much in retail, but to the extent that there are other business models that are retail-like in nature, there is obviously some cross-application – or perhaps application for those that invest directly in retail. Of course, while retail may be a dead sector for investment opportunities at the moment, there are always niches at the corners – even Amazon has seen fit to buy some businesses (though, usually, not before trying to put them out of business first). As Sam Walton once put it,
“Could a Wal-Mart type story still occur in this day and age? My answer is of course it could happen again. Somewhere out there right now there’s someone – probably hundreds of thousands of someones – with good enough ideas to go all the way. It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there. It’s all a matter of attitude and the capacity to constantly study and question the management of business.”
* You can argue that Starbucks is more “restaurant” than “retailer,” but I think their business model is more retail than restaurant, and Schultz himself views Starbucks as a retailer.
** Note: in addition to the “big five” books, I also drew on sources such as Stop and Sell The Roses (1-800 Flowers), Built From Scratch (Home Depot), Delivering Happiness (Zappos), Uncontainable (The Container Store), Shoe Dog (Nike), and various other broader-topic books (Different by Youngme Moon, The Innovator’s Dilemma by Clayton Christensen), as well as news articles/etc and my own research on some publicly-traded retailers. I by no means claim to be an expert – these are just casual observations from my reading.
[Note: this post is intended as a companion to “Ten Commandments From 1.5 Centuries Of American Retail Dominance (And Failure)”]
Dry, theoretical, textbook-style instruction is generally agreed to be suboptimal for learning about most topics; hands-on work – case studies, lab experiments, or so on – is a major improvement.
But it isn’t perfect! We’ll set aside lab work for now and focus on the softer sciences. As it concerns history, whether that of business/finance/investing or that of nations and ideas, all that case studies give us is one possible outcome of many – while in some cases you can come up with enough sample size to draw definitive conclusions, oftentimes, “major” events (whether strategic decisions by businesses or major empires) have such unique circumstances and limited replicability that you can’t have a high degree of confidence in the positive takeaways from studying them (this is discussed in-depth in Phil Rosenzweig’s excellent The Halo Effect.)
So first-level thinkers get blown up: “oh, Buffett did XYZ, so I will too.” Well, no, that opportunity set doesn’t exist anymore – so the somewhat more sophisticated second-level thinkers think instead, “oh, Wal-Mart built a successful business because the company had ABC traits and followed QRS process, so let me look for businesses that model those traits and that process.” And that’s directionally better than trying to plaster discount stores all over small-town America circa 2017, but we’re still not quite there yet.
Take a seemingly easy/simple takeaway like “be honest and have integrity.” This seems to be a commonality among leaders who are widely admired, from Benjamin Franklin to Abe Lincoln right on through Charlie Munger, and it feels like the sort of thing that should be universally true.
But is that always and everywhere the case, or are we not thinking deeply enough? Indeed, one of the few redeeming qualities of The Moral Animal (emphasis on “few”) was an interesting discussion of the multiple potential “stable” equilibria in some classic game theory exercise – I forget the details, but basically the takeaway is that in a world where everyone plays “tit for tat” and recognizes the benefits of cooperation, then that is the right strategy… but if you get enough people who will default to being mean all the time, that becomes the only workable strategy.
Obviously, “be a jerk to everyone” isn’t my takeaway from that – but the analog in the modern business world could be the question of: what’s the most effective way to read a company? I want the answer to be “kindness and puppies,” because I’m the kind of guy who is going to follow that approach damn the empirics, but unfortunately for me, what I want is not always what’s true. For every business that succeeded because of its cute, cuddly culture (Zappos, The Container Store, no okay look I swear this post isn’t just an excuse to stuff Amazon affiliate links all over my blog), there’s a clear counterexample of a CEO that reached previously unimagined heights by berating the !@#$ out of employees (Musk, Bezos – and note that I have no opinion on TSLA as a financial success or otherwise; I’m referring purely to technical accomplishments, of which it seems they have had many.)
These are contradictory and to some extent irreconcilable lessons – is the answer that leadership style doesn’t matter? That seems unlikely. It seems more likely that there’s nuance: in certain industries, under certain conditions, with a certain compensation structure and a certain kind of employee… one or the other is correct. Maybe. But are we able, from this small sample size, to ascertain in exactly what situations brutality is superior to empathy? Maybe you’re smart enough to determine that with a high degree of confidence; I’m certainly not.
So what, then? Abandon vivid, engaging stories and instead rely purely on dry, dull, uninteresting research papers that perform rigorous statistical analysis? Well, no, there are plenty of flaws in that approach too, as Nate Silver himself points out in The Signal and the Noise. There’s the issue of backtest overfitting to deal with, confusing correlation with causality, etc etc.
Here are a few simple rules I propose for getting the most out of reading stories:
- Think probabilistically and make allowances for data which is not included.Certain entrepreneur stories – Phil Knight’s
Shoe Dog and Richard Branson’s Losing My Virginity come to mind – could be reductionistically expressed as, “I spent a lot of my young adulthood screwing around doing what felt right, and ended up becoming a billionaire.” It’s a compelling narrative, but also a dangerous one – it’s easy for someone who is a billionaire to look back and say ah, don’t be a corporate square, follow your passion and go on a mystical journey and everything will work out…
… but I’m almost certain that if you had access to aggregate statistics, the life outcomes (in pure financial terms rather than more holistic life satisfaction) for 20somethings who, at least at first, pursue serious corporate jobs to build a resume, experience, and a nest egg before branching out, are probably way beyond those who meander along without much direction and hope things will just fall into place. I know some really smart and talented “high-potential” people from high school who, the better part of a decade later, are now taking that latter route, and financial stability ain’t on the horizon, let alone billions.(Yes, there is an irony in me saying this, given that I’m, uh, not and never intending to hold down a serious corporate job – but then again, I did do that for at least long enough to figure out what was going on…)
More broadly, many entrepreneur stories include some episode where everything was mortgaged to keep the business going… often including the houses or credit cards of family/friends/etc. That doesn’t mean it was the right decision – it just means it worked out.
By reminding yourself that the story you’re reading is merely one example that may or may not be representative (and in this case is not), you’re better able to contextualize the learning and think in terms of, “doing XYZ might increase my probability of success”, rather than the directly causal, “XYZ -> success”. Attempting to read over a longer period of time (ex. covering the long-term history of retail dominance in America rather than just one isolated story) also helps to build context and figure out what was common to success or failure under different circumstances and environments, providing a higher level of confidence in takeaways.
- Assign “inversion” takeaways a higher level of confidence than “positive” takeaways.
Every story has multiple sides: if someone wins, someone else probably fails (a competitor, an enemy, someone whose business gets disrupted under the same circumstances). Saying that “oh, X Y and Z led to successful businesses over time” is likely a weaker takeaway than “well, clearly A B and C led to failure in almost all circumstances.” For example, in the history of retail, businesses that focused on protecting legacy profit streams in the face of competition, vs. going full-throttle after new/evolving markets, generally tended to lose both their profit stream and their right to continue in business at the end.
How could things have turned out differently – were there disaster paths that were avoided at the last second? As another example, in Benjamin Franklin’s autobiography, many seemingly promising/intellectual friends of Franklin succumbed to vices like drink and gambling – which Franklin largely avoided.
Similar to the prescriptions for a miserable life in Munger’s famous speech, focusing on how losers lost rather than on how winners won might be more educational, if less heartwarming. This isn’t perfect, of course, but it may at least help frame things in a useful manner.
- Go for third-level thinking, not platitudes.
We’ve already discussed first-level thinking (direct cloning) and second-level thinking (cloning of what led to the approach, rather than the approach itself). In the case of retailers, the latter could be, for example – relentlessly focus on the customer. Going only one step beyond often leads to unhelpful platitudes, though. Third-level thinking is going even deeper – what are the little nuances people miss?
Amazon, for example, showed an almost alarming willingness to burn money going after new categories (to further its mission of providing its customers with what they wanted), but it seemed to do a very good job of quickly retreating in categories like jewelry, or formats like auctions, when it became clear that there were relatively insurmountable barriers to entry. Wal-Mart, for its part, had plenty of innovations of its own but also methodically borrowed every good idea everyone else came up with.
So maybe the real lesson to build a successful retail business is:relentlessly focus on the customer in areas where you’re actually cut out to hack it, but leave no stone unturned in figuring out what works and what doesn’t.
- Be aware of the author’s biases.
It’s important to remember that no book is an entirely accurate account of what happened – rather, it’s the author’s interpretation of the facts that were available to him, filtered by his schema. Obviously, an autobiography is usually going to present things in a more favorable light than a third-party biographer would, and this is not just for ego reasons, but rather because when you’re working more off your memory than objective third-party source material, you’re not necessarily going to have an accurate picture (as discussed in Schacter’s excellent The Seven Sins of Memory.)
That said, third-party biographers aren’t perfect either – often, they have their own agenda to promote, whether intentionally or not – one thing to watch out for is “man with a hammer” syndrome where an author has a certain strong ideological view of the world (say, an economic or sociopolitical view – think about all the crazy super-political people you know who are blinded to reality) and/or believes strongly in some intellectual theory (environmental determinism, etc), and they’re going to naturally (not maliciously) tend to emphasize the factors that support their theory and crowd out any possible explanations, due to confirmation bias.
As an example, Marc Levinson (The Box, The Great A&P) spends what seems like an inordinate amount of time focusing on regulatory and labor relations issues – clearly these were important issues in both stories, but at the same time, might there be more (or less) to the story than meets the eye? Or other angles that were equally important but got short shrift? Questions to ponder.
As another example from the reader’s side, given that I grew up in Texas and hold a strong philosophical belief in the agency (free will) and self-efficacy, I have a natural tendency to focus on actors and their choices rather than circumstances/context – which is part of the reason I try to balance it out and pay more attention to the context rather than the protagonist when reading business narratives.
- Read more stories (critically). I realize this is somewhat counterintuitive advice given that I’ve spent quite a bit of time talking about all the potential pitfalls of buying well-told stories hook, line, and sinker, but the more you read while thinking about these issues, the more you get a feel for quality “business journalism” compared to what I’ll term “too-cute,” “just-so” storytelling that is fun to read but not very substantial – ex. Malcolm Gladwell, Jim Collins, etc. One general heuristic I use is: how hard does the author try to fit the world into their preferred box, vs. acknowledging (implicitly or explicitly) the other potential explanations for what they cite?
Stories are here to stay, and almost certainly for the better – but it’s important not to confuse a good story with factual reality. I love well-told narratives about great businesses, and have learn a lot from them – time will tell if I learn the right lessons…
Hey y’all: as part of a project I’m working on, I’d like some recommendations: what books have you read, either recently or in the course of your life, that would deserve six stars on a standard 1 – 5 star rating scale? i.e. books that weren’t just good or great, but truly life-changing, and had a lasting impact on how you viewed the world. $25 Amazon gift certificate and public credit to whoever’s recommendation(s) I like the most. Contest open to the general public, but to win the certificate, you do have to be on my mailing list as of 9/1/2017. (#incentives)
Please don’t send names of commonly-cited investing books (i.e. Poor Charlie’s Almanack or The Most Important Thing or so on), because I’ve already read all of those. Please also nothing political or in the field of traditional economics (behavioral econ is allowed though) – it needs to be stuff that’s directly applicable to decision-making in work and life.
I’m looking more for books that make (or break) paradigms in other fields – stuff like Misbehaving by Richard Thaler or The Design of Everyday Things by Don Norman – or anything else that has a near-infinity return-on-time-invested. My general criteria is utility (i.e. some function of enjoyment and learning) divided by time invested, contextualized by opportunity cost, i.e. differentiation from the category (for example, it’s hard to merit “truly life-changing” status in the category of entrepreneur/business biographies, since there are so many of them that are really good.)
In the spirit of the books needing to be truly exceptional, please cite no more than three… runners-up / honorable mentions are welcome and encouraged, but not prize-eligible. Contest open through September 1st… winner will be decided sometime later in the fall (after I’ve had time to read all the recommendations!)