A look into Saks Fifth Avenue thru the lenses of the Theories behind Disruptive Strategies forHarvard Business School
Originally written in 2019 for my Disrputive Strategy course, it still applies to Saks today in 2023.
Description of the company:
Saks Fifth Avenue founded in 1867 in New York City is an icon of American Luxury department stores and has become almost a household name. “Saks Fifth Avenue is an American chain of luxury department stores owned, since 2013, by the oldest commercial corporation in North America, the Hudson’s Bay Company. Its main flagship store is located on Fifth Avenue in Midtown Manhattan, New York city.” i (Wikipedia)
Saks carries designer Men’s and Women’s clothing, shoes and accessories as well as beauty products.
Saks 2013 Revenue was $3.147 Billion with an Operating income of $138 Million and Net Income of $62.88 Million.ii (Wikipedia)
Saks has 40 locations the USA, 6 International Locations and 110 outlet stores called Off Fifth with a total of 12,900 (2011) employees. (Wikipedia) Saks’ iconic flagship store is located at number 611, 5th avenue New York, New York and boasts 650,000 square feet of space.
Characterization of the situation:
Despite seeing eight quarters of consecutive growth, Saks is facing a changing retail landscape, high rents and low overall performance. Owner of Saks, HBC has sizable debt according (FortuneMagazine) and is selling off struggling European business, Lord and Taylor (just 10 blocks away from the fifth Ave location and Gilt Group. It is also closing 20 of its Off Fifth Discount stores and halting Canadian expansion.iii
On top of this Saks’ NYC Flagship Looses over Half its Value according to Hypebeast article of Nov 21, 2019, “…this valuation is approximately a 60% drop from where it was at $3.7 Billion USD five years ago. The company says the low appraisal was based on “the performance of the store relative to expectations in 2014, changes in market rents on New York’s Fifth Avenue, and the changes in the retail landscape” iv
As the department store world in the USA has continued to decline the positioning of Saks as a luxury
department store offering the best designer fashion with service from the best Saks Fifth Avenue Club Stylists in the best locations is a profit formula that doesn’t work anymore. Saks, an incumbent, is slow to change because their profit formula is static with heavy fixed costs requiring major cash flow to pay. Can they quickly turn their business around to not be another “has been” department store? Can Saks be agile enough with its many locations to change their profit formula to skate to where the money is?
The key theories from Disruptive Strategy that are most applicable to this organization’s current situation are:
Disruption (New-Market Disruption): Changing consumer shopping patterns with emergence of luxury E-Commerce as well as increased focus of the big luxury players on directly owned Brick and Mortar stores.
Interdependent vs Modular Strategy: From my own experience in the luxury industry, I know Saks operates with a blend of wholesale and leased corner strategies. What was once its Core Competency, that of owning the best retail locations across America and putting in the best wholesale curated assortment of designer clothing, is no longer relevant when the designer brands are doing it themselves.
This was a highly interdependent strategy. The brands needed Saks and Saks needed the Brands. Brands however have come more established and are taking control of their own retail experiences. A Leased corner model is where a department store can rent a section of the store to a Brand, let the Brand personalize the space, own their own stock, hire their own staff and just pay a percentage rent to the department store. This is a modular approach that lowers the high fixed costs of stock and staff for the department store owner. Saks has a blend of this but has not committed enough square footage to this model to lower their own costs enough to handle the changing environment.
Job-To-Be-Done: Ecommerce is not new to fashion, but consumers are purchasing online as well as the maturing of many brands getting to the point where they can open and operate their own directly controlled stores and e-commerce sites and no longer must rely on wholesaling their products to department stores like Saks. This changing retail landscape requires Saks to really ask what job are they to fulfill to survive? What Saks did in the past is not relevant presently. Their wholesale product assortment is also too similar too competitors Neiman Marcus and Nordstrom. They need to ask what Job the new fashion consumer really wants done.
Resources, Processes and Priorities: Saks Parent Company HBC has heavy debt load after aggressive expansion into purchasing other companies.v (Fortune Magazine) therefore Saks must compete internally for resources to follow emergent strategies and therefore they will continue to follow their Deliberate Strategy. Saks own resources are going into paying high rents and owning stock vs ensuring their stores are relevant to today’s fashion consumer. Processes and profit formula are on a wholesale to retail business model. The Resource allocation is challenged because they have high fixed costs: Rent on 5th Avenue as well as so many locations in the USA not to mention 110 Off Fifth Discount Locations.
Sustaining Innovation: How is Saks doing this? Saks is a mature incumbent business therefore it must consider a sustaining innovation model to regain its preeminent position in the marketplace. I don’t think they are and this is the reason their valuation of their iconic flagship store has dropped 60%. Despite the $250 Million renovationvi (Bloomberg) of their flagship store being an important Sustaining innovation strategy, the store is still amid the renovation and the results have yet to be seen. Also doing renovation on one store may be fine but what about the 39 other locations in the USA? Do the clients in these locations not deserve the best “experiences” as well? The company’s resources go into paying high fixed costs of rent and staffing. Products also are not that differentiated from their competitors Neiman Marcus or Nordstrom who also have a strong network of locations throughout America.
Recommendations for a future course of action:
The key for future success for any company is to skate where the money is however Saks’ resources seem to be heavily allocated in paying the high fixed cost of rent. This is a key theory that Saks most likely realizes but since it is a large incumbent with high fixed costs it may not have the resource allocation process to skate to where the money is. It is focused on sustaining a network of 40 Full price stores 6 international stores as well as 110 outlet stores. The example of Saks foray into Canada is a case of skating to where the money is. The Canadian luxury market is a developing market with a savvy global consumer. Their plans were to open several locations across Canada in prime real estate properties owned by its parent HBC. After opening three locations in Canada, Saks has decided not to further invest in Montreal and no plans for Vancouver yet.vii (Retail insider) The luxury market is growing in Canada however Saks’ resource allocation process doesn’t allow further investment. Management must have lost patience for Saks to develop a strong new network of stores north of the border.
The key courses of action that Saks should follow are: Sustaining Innovation and turn into a more Modular business model however these can only truly happen if the Resource allocation process were flexible enough for this large incumbent to allow for the time to harness emergent strategies. I would suggest to the CEO that he sell off or close the most underperforming Saks locations to free cashflow to allow for innovations in the key top performing doors. This however may be very challenging pending the long-term lease agreements with its various locations landlords.
For sustaining innovation and a modular business model follow the example of one of the best global department stores in the UK; Selfridges and Co. Selfridges only has four locations, one of which is their powerful flagship store on Oxford Street, London. Selfridges with only four locations is also an iconic luxury department store and has revenue of $2.27Billion as of Feb 2018. (BOF) Compare that to $3.147 Billion and 40 locations of Saks and one can see that Selfridges fixed costs to generate such volume is much lower than that of Saks.
The method of wholesaling product at basic retail stores has become commoditized (e-commerce) and therefore the only way for Saks to survive would be to become more than a retail store: entertainment, eating, socializing, enticing popups, art installations. Henry Gordon Selfridges founding insight that a modern department store must be a true destination; welcoming, entertaining and a social landmark. (BOF) From the Business of Fashion: The Secrets to Selfridges’ Success, Oct 26, 2018. “Selfridges has embraced the concession model, allowing brands to run their own shop-in-shop. Because brands typically manage their own stock and personnel with greater focus, the approach often outperforms the traditional wholesale model. “viii
Saks presently has some leased corners however it is not in all their locations and its mix of leased to wholesale is not strong. I suggest this more modular approach of leased corners to lower the heavy costs of staff and stock, and thus further free cash resources for Sustaining innovation.
We are living in the experience economy where time is the basic currency and shopping is a social activity, this is the Job to be Done. Consumers want to have fun. Why else would a customer go to a brick and mortar store when almost every product sold in that location can be purchased online? How does a department store become an omnichannel player is the key challenge: e-commerce mixed with brick and mortar retail and keep clients coming thru the door of its rent heavy prime locations? Integrate around the job to be done: The theory suggests that companies integrated around a “job” can achieve market differentiation and avoid disruption. Jobs to be done generally have two dimensions: 1) Functional: the practical role the product or service fulfills and 2) Emotional/social: the feeling one gets from owning or using the product or service. It is the second that Saks needs to identify quickly for their Brand to stand out in the competitive market of 2020 and beyond. Selfridges has the following core competency that I feel Saks is missing in enabling a turn around. “Unexpected brands, Entertaining popups, Seamless and curated customer journey that unites economic benefits of concessions with a genuine sense of discover” ix
To do this I recommend to Spot Disruption by studying customers who stopped shopping at Saks. Are customers going to Brand owned shops or shopping online? I think Saks has lost their competitive advantage. Who cares if they have a store on Fifth Avenue if it is boring. And how do they translate what is to be a Fifth Avenue experience to all their regional stores? What truly does Saks stand for? What sustaining innovation, that customers really care about, have they done?
Saks, as an incumbent, will be challenged in organizing for Innovation because as the theory suggest the wrong resources, processes, and profit formulas are often used if Saks does not set up a separate business unit for disruptive innovations so it can develop the resources, processes, and profit formula needed to win. Managers must be able to anticipate the resources, processes, and profit formula their organization will need in the future.
Saks must view their strategy as not something that is fixed but temporary and must evolve to the Job to be done. Where they used to make the money is not where the money will be made in the future. Therefore, move from wholesale to a strong mix of leased corners to ensure cashflow and profit are there. Then with cash flow fixed, Saks can invest in making the store more experience based, fun and interesting, add restaurants, champagne bars and art installations like Selfridges.
Can Saks survive? Only if they act quickly by being free enough to ensure they truly answer the Job to be Done.
i Saks Background information Wikipedia https://en.wikipedia.org/wiki/Saks_Fifth_Avenue
ii Saks Background information Wikipedia https://en.wikipedia.org/wiki/Saks_Fifth_Avenue
iii A Strategy to Skirt the Retail Carnage: Hudson’s Bay Aims to Go Private By Scott Deveau and Sandrine Rastello Bloomberg June 10, 2019 https://fortune.com/2019/06/10/hudsons-bay-going-private-lord-taylor-owner-breaks-with-germany-signa-hbc-retail-apocalypse/
iv Saks Fifth Avenue NYC Flagship Loses Over Half Its Value: by Emily Engle, Nov 21, 2019
https://hypebeast.com/2019/11/saks-fifth-avenue-nyc-flagship-appraisal-valuation
v A Strategy to Skirt the Retail Carnage: Hudson’s Bay Aims to Go Private By Scott Deveau and Sandrine Rastello Bloomberg June 10, 2019 https://fortune.com/2019/06/10/hudsons-bay-going-private-lord-taylor-owner-breaks-with-germany-signa-hbc-retail-apocalypse/
vi Saks Fifth Avenue Nears Completion of $250 Million Renovation, By Kim Bhasin and Sandrine Rastello, Feb 5, 2019 https://www.bloomberg.com/news/articles/2019-02-05/saks-fifth-avenue-nears-completion-of-250-million-renovation
vii Saks Fifth Avenue Appoints New Canadian Flagship General Manager as it Looks to the Future By Craig Paterson, November 15, 2018 https://retail-insider.com/retail-insider/2018/11/saks-fifth-avenue-toronto-gregory-boggan/
viii BOF: The Secrets to Selfridges’ Success: Robert Burke Associates, Oct 26, 2018 https://www.robertburkeassociates.com/press1/2018/10/26/bof-the-secrets-to-selfridges-success
ix BOF: The Secrets to Selfridges’ Success: Robert Burke Associates, Oct 26, 2018 https://www.robertburkeassociates.com/press1/2018/10/26/bof-the-secrets-to-selfridges-success
