269-Failures in Reliability Lead to Share Loss

We have written several times before about the Customer Buying Hierarchy (i.e. customers buy Function, Reliability, Convenience and Price, in that order).  See HERE for perspective.  We have also written, on several occasions, about companies winning and failing customers in a marketplace. In a stable market, failure of a supplier causes more market share to move than does another competitor’s “win” of market share against its peers. See HERE.  Most failures occur in Reliability. Recently, two of America’s paragon companies have failed their customers on Reliability and are now struggling to catch up. Other leaders have had a similar problem and have recovered nicely.

Macy’s is a clear leader in the department store market. Over the last several years, Macy’s has purchased and integrated other large department store competitors. For example, in 2005 Macy’s purchased May Department Stores. As the company worked to integrate these acquisitions and obtain synergistic savings, their attention swerved from customer service. The company’s failings were greatest in customer interactions with the company’s sales associates. Nearly half of customer complaints focused on actions of sales associates. These are failures in Reliability. A customer expects to be well treated by a department store that charges relatively high prices for its goods. Macy’s failed to do that. The company’s market share began to drift lower as a result of these failures.

Now Macys is investing a great deal more money and time into the proper training of its sales associates. This investment is beginning to pay off. A recent survey of customer satisfaction indicated that the company was making strides in improving its reputation. Still, it lags the performance of some of its important rivals. This is still a Macy’s work-in-progress.

Wal-Mart is another industry paragon who drifted from its Reliability promises. Wal-Mart committed two notable sins. First, it removed some products that were important to its core customers. The company did so in an effort to improve the product mix and the margins a better product mix would bring. Some of its core customer volume began to drift away.  See HERE for some perspective. The company also moved away from its aggressive pricing. Instead of every day low prices, the company began to promote deals on some products while raising prices on others. Customers didn’t like that either. Recently, a survey by a retail consulting firm has found that Target Stores offered prices below those of Wal-Mart. So, Wal-Mart has created Reliability failures in both product availability in its stores and its promise to have “always low prices, always.”  See HERE for additional perspective. The company’s market share has also drifted lower.

Wal-Mart now promises to return to its core values and core customers. It is bringing back the products it once eliminated in favor of higher margin products. It is getting more aggressive in pricing once more. This, too, is a work-in-progress.

Certainly, these leaders can recover from these miscues. We have seen other leading companies struggle with Reliability and yet recover nicely. For example, several years ago McDonald’s went through a period of time where it was losing market share. As the company examined the reasons for this market share loss, it noted that customers began to see its prices as high in the quick service restaurant industry. In addition, its products in stores had developed a reputation as being about the same as or, in some cases, lower in quality than some of its big competition. Under the leadership of a CEO well versed in operations, the company returned to its roots by emphasizing its core quality values and aggressive pricing. Today, McDonald’s is the unquestioned leader in the quick service restaurant industry. Many of its competitors struggle to keep up with McDonald’s. Most fail to do so. McDonald’s again has gained share in the industry over the last several years. McDonald’s success in reversing its Reliability failures suggests that the pathway is open for both Macy’s and Wal-Mart. They both should be able to enjoy similar success. The odds are they will.

6 July 2011

Update:

Both Macy’s and Walmart have struggled in the face of intense online competition. During the last five years, returns on equity for both Walmart and Macy’s have trended lower and have shown much greater volatility.  Walmart has been the more successful of the two but it still falls short of the average stock appreciation for the Standard & Poor’s 500.

Despite impressive efforts to bring about growth, Macy’s has struggled to grow its topline and has seen a gradual erosion of its operating profit margins over the last several years. At the end of 2015 Macy’s had 770 stores. By early 2019, the store count was up to 867 stores. The store growth was the result of Macy’s many initiatives to create growth, including the creation of new Macy’s related brands, the early addition of Apple stores within Macy’s and, more recently, plans to introduce new Toys “R” Us stores inside Macy’s stores. The company has also undertaken major overhauls to improve the stores and has closed many underperforming stores. Still, it’s revenues have been on a slow decline as have its operating margins. While remaining the largest department store in the US, the company suffers from the intense competition of online retailers.

Walmart has followed a similar and somewhat more successful pathway. It has developed a successful online presence but still struggles with growth. It’s revenues and gross margins have grown at about 3% over the last five years but its operating margins have shrunk, and its net income has remained flat.

During the last five years, returns on equity for Walmart and Macy’s have trended lower and with much greater volatility.  The stock market has noticed. Both Walmart and Macy’s have proven unable to keep pace with the growth in average stock prices over the last several years. In the 10 years to January 2023, the S&P gained 166%, Walmart 108% and Macy’s fell 42%. Performance was somewhat better over the last five years for Walmart. The S&P gained 39%, Walmart 34% and Macy’s lost 16%.

The problem for both Walmart and Macy’s is, of course, Amazon.  Amazon beats both of these companies most of the time on all four dimensions of the Customer Buying Hierarchy. It offers more Functions, carrying far more products than both of the other two combined. Amazon’s Reliability is impressive. It usually delivers when it says it will and corrects problems, including any needed returns, far more easily than either Walmart or Macy’s.  It has better Convenience. I can shop on my desktop or iPad, review quality rankings and check out frequently asked questions in a short period of time. And, I can complete my order with a one-button check out. Amazon’s only Convenience disadvantage is the one to three day wait time to get my product.   Finally, the competition among Amazon’s sellers often means lower prices for Amazon products. Amazon is very difficult to beat because it fails so infrequently. See HERE and HERE for more explanation.

1/23

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