The Rise Of Retail Darwinism | Seeking Alpha – Seeking Alpha

Twenty-seven years ago marked the end of a shopping era in Baltimore. That was the year 1990 that retailer Hutzlers shut its doors forever after 132 years in the retail business.

The Grand Dame of retail in that town, my hometown, wasnt just a store: Hutzlers was a shopping experience. When its customers walked through its doors, they were treated to unbelievably personalized service and a vast but curated selection of exclusive merchandise. When they walked out, they held tightly to the brand cache that came from carrying a shopping bag emblazoned with the Hutzlers name.

As a longtime customer exclaimed when the store closed its doors, Hutzlers was like your mother; they took care of you. In 1990, everyone living in Baltimore, having grown up shopping at Hutzlers for just about every significant event in their lives, grieved like theyd just lost someone special.

I reflected on this story as I was preparing to speak to a group of retail executives last week since, like most middle-class kids growing up in Baltimore, shopping at Hutzlers was just what you did. It was where moms took their little girls to buy their Easter and Christmas finery and took their little boys to buy their Oxford shirts and navy blue blazers. Its shoe department selection and service rivaled any department store of its era.

I thought the Hutzlers story was an appropriate metaphor to spark a conversation about the state of retail today and what we might learn from those retail Grand Dames who exist no longer. Its a fitting case study to uncover important insights and reflect on the crisis that traditional retail is facing.

And debate an ending that may also be both similar and inevitable and perhaps even the right outcome for the many traditional retail brands who now struggle to reinvent themselves and survive.

Retails Golden Age

Hutzlers opened its doors for the first time in 1858 on the corner of Howard and Clay Streets in downtown Baltimore. One of the Big Four that occupied the same block in downtown Baltimore Stewarts, Hochschild Kohns, The Hecht Company and Hutzlers the department store then was a modern marvel of merchandise selection and presentation all under one roof. Women went shopping in dresses and hats, men in suits and ties. Shopping was an enjoyable, somewhat leisurely and very social, experience.

Hutzlers prided itself on being a retail innovator from the start.

Its stores had passenger elevators with elevator operators, gigantic display windows and a refund policy that gave customers back their cash if they returned items they no longer wanted even if those items werent bought from their store. They had a restaurant, the Tea Room, that served homemade Maryland classics, like Crab Imperial and Lady Baltimore Cake, that not only attracted shoppers but nearby businessmen for lunch.

Hutzlers was the first store to create a one-price policy that eliminated the common practice of haggling with sales associates and with it, the inequities over what its customers would pay for the same item.

They also curated merchandise that tapped into what consumers wanted to buy at that time. Hutzlers boasted, for example, that its fabric, button and lace department rivaled anything that existed outside of New York. What may seem quaint and anachronistic by todays standards, their approach responded to a pretty important consumer trend in the late 19th and early part of the 20th centuries: the rise in popularity of the sewing machine and the desire of middle-class women to wear different clothes every day. By 1900, nearly all middle-class women had sewing rooms in their homes, using them to make clothes for themselves and their children. Hutzlers wanted those women as their customers.

During the Great Depression, Hutzlers also responded to the economic hard times upon which many of its customers had fallen. Hutzlers Downstairs, described as a thrift store with Hutzlers standards, opened on the lower level of its downtown retail store in 1929. It carried a line of discounted merchandise, but not just any discounted merchandise merchandise that came with the Hutzlers imprimatur for style and quality.

That customer intimacy was the foundation upon which Hutzlers built its business and its financial strength for its first 90 years. It invested time, money and effort into building and securing those relationships. Someone, for example, was assigned to read the newspaper daily for notices of customer (or family member) deaths, births and engagements and then send personal handwritten notes, sometimes even accompanied by a small gift to those customers.

Hutzlers launched a free, same-day delivery service for its charge customers who wanted the convenience of charging and sending their bundles home. And for women who drove to its downtown retail location from the suburbs and parked in their parking garage, sales associates voluntarily carried their bundles so that women didnt have to juggle both their shopping bags and their kids on the way to the car.

Hutzlers focus on the customer could also be seen in its retail merchandising strategy.

Buyers worked with brands to source and then sell exclusive labels and clothing lines. It also launched new, popular and first-to-market products in their stores, always in limited supplies to engender immediacy and scarcity and always with the idea to use those products to bring people into the stores to buy those items and other things while there. In the 1970s, Hutzlers began staging a series of festivals in their downtown store, featuring items from a variety of European ports of call to keep women coming into the store to explore and buy those one-of-a-kind products.

Hutzlers sales were legendary and widely coveted because they were held only twice a year. Its annual Centennial Sale featured markdowns of existing merchandise. But it was the annual Occasion Extraordinaire sale that created the desire for people to stand in line for hours before the store opened to get their pick of that sale litter.

OE, as it was known, required a rigorous curation of merchandise on the part of Hutzlers buyers, well in advance of the sale. Items made available for the sale had to be approved by management first and offered at a minimum of 20 percent off. Often these products were sourced from other parts of the world and specified only for this sale. One of the privileges of being a Hutzlers charge customer was access to this sale two days before it was open to the public.

Life was very good for the Hutzlers family and its eponymic department store.

Until, suddenly, it wasnt. At all.

Hutzlers saw the same data that everyone else did in the 1950s and 60s and responded to the economic reality of its shoppers moving to the suburbs. It expanded its footprint accordingly, opening its first suburban location 80 years later in the affluent suburb of Towson, Maryland, in 1952. Between 1952 and 1981, Hutzlers opened nine other suburban locations.

It also kept investing in its downtown flagship store, given its significant contribution to the bottom line at the time. It was also an asset that the Hutzlers family valued immensely. And it was also a decision that would ultimately set the stage for the death spiral that would deliver Hutzlers demise.

The late 1960s and 1970s was a time of great social and economic upheaval in Baltimore. Civil unrest drove those who once lived and shopped downtown to the suburbs. Over a 40-year period, from 1950 to 1990, Baltimore Citys population decreased by nearly 214,000 people with 119,000 residents leaving the city in the decade between 1970 and 1980. Another 51,000 left between 1980 and 1990. Those who used to shop downtown also stopped going.

At the same time, the Vietnam War created a wave of activism against The Establishment. Young people turned their backs on, among other things, the retail stores where their establishment parents shopped.

The two-year recession that started in 1973 saw the post-WWII economic boom come to a screeching halt. The rise of the two-income family during that period introduced time pressures that didnt exist before. Women entering the workforce had no time for leisurely shopping trips to Hutzlers downtown store or even any of its suburban retail locations.

At the same time, discount department stores came marching full-force into Baltimores suburbs. Caldor, Two Guys, Korvettes, Epsteins, Luskins to name but a few appealed to this cash-strapped, time-starved shopper under the rubric of more value for less money. Those stores were a short, easy drive away with free parking in vast parking lots.

Hutzlers, not unlike its other Big Four compadres, began to see its sales suffer because of these shifts and saw it happen most dramatically at its downtown flagship store, which once drove the bulk of its revenue. In 1968, the downtown store delivered $22 million in annual sales. Nine years later, in 1977, those sales had been gutted by 50 percent.

But despite the lack of customers and the lack of sales there, Hutzlers doubled down on investing in its downtown location. While three of its Big Four competitors cut back and ultimately closed their downtown operations in the late 1970s and early 1980s, Hutzlers invested millions in the renovation of its flagship store one they affectionally called the mothership. That renovation was completed in 1985 in the hopes of bringing its suburban customers back downtown as part of the citys bigger plans for urban renewal and redevelopment.

Five years earlier, in 1980, Hutzlers opened a new store near the citys brand new, tony Inner Harbor in an effort to appeal to a female business customer shopping on her lunch break. A smaller format store, it featured luggage and work-appropriate clothing lines for men and women.

Neither delivered the impact that the Hutzlers team had expected.

The limited selection of merchandise combined with competition from the newer boutique shops in the Inner Harbor area meant the store failed to grab the attention of that female shopper on her lunchbreak. And the Palace Store was stocked with merchandise at price points that might have appealed to a suburban shopper thirty years before, but was well out of the reach of the urban dweller with far less money to spend.

Keeping the downtown store afloat in the midst of the macro social and economic issues that retailers were facing in the late 1960s through the 1980s drained the profits made in Hutzlers other suburban stores. That meant less cash all around with which to buy the more exclusive merchandise that the loyal Hutzlers shopper was accustomed to buying.

Hutzlers had no choice but to change its merchandise mix to reflect both its cash-strapped reality and, it thought, the shoppers demand for more reasonably priced goods. But that only confused its loyal customer base, who no longer knew what Hutzlers stood for, while failing to attract new customers who had already established other store preferences.

Hutzlers was forced to close stores and sell off real estate assets, notably the land upon which the parking garage adjacent to its Towson store was located. The Towson store was the last Hutzlers store to close in January of 1990.

Ironically, perhaps, that location is home to a mega Barnes & Noble (NYSE:BKS) that will close in May of this year. None of the other stores referenced in this piece exist anymore none of the discounters that challenged Hutzlers and none of the department store rivals who tried to, either.

The one exception is the Hecht Company, one of the Big Four that was acquired by The May Company in 1959. The May Company, with its scale, was in a better position than the other family-owned and operated businesses to put substantial capital into the Hecht Company franchise in Baltimore, even propping up its downtown location as a lower-priced competitor to Hutzlers over the years. The May Company merged with Federated Department Stores in 2005, and, in 2006, the last remaining Hecht Company stores in Baltimore were converted to Macys (NYSE:M).

And we all know Macys ongoing retail struggles.

There is a lot we can learn about retail today from the Hutzlers story and why traditional retail stands where it does right now.

The shift from urban shopping to the suburbs is not unlike the shift from physical to digital.

Hutzlers made a critical mistake when trying to navigate that shift: It assumed that people would always prefer shopping downtown. Even until the end, the retailer was convinced that they could always lure shoppers back to the place that they loved, but found too late that different customers with different preferences didnt value the same things. Undaunted, Hutzlers continued to invest in that physical asset even at the expense of its other locations until it was forced to sell off all of its assets to pay the bills.

The shift in consumer preferences brought about by the changing economic and social mores is no different than the shift being driven today by the changing preferences of all consumers who value a different retail shopping experience and define loyalty very differently.

Millennials dont want to shop at the stores that their parents shop any more than we wanted to at their age, unless its Amazon (NASDAQ:AMZN) where they even buy their clothes. Their litmus test isnt what name brand is on the masthead, but whether a store can offer them value for the money and the products they and not their parents want to buy. Hutzlers banked on the fact that their brand alone was enough to keep customers coming and once they came, theyd find what they wanted. In the end, it wasnt even nearly enough.

The allure of the discounter at the expense of Hutzlers sales is no different than the allure of the discount today.

Retailers have trained the customer that there will always be a sale. So, like good students, consumers wait until they get a promo code thats better than the last promo code they were offered two days before. The days of anticipating a sale and the execution of strategies that advocate the exclusivity and scarcity of merchandise at full price as a lure for shoppers is long gone.

The allure of the experience of shopping at Hutzlers is no different than the experience that everyone seeks today when they shop.

Serendipity was the experience that Hutzlers created for shoppers when times were good the anticipation of not knowing what that shopper might find until she walked through the door and started to navigate the store. More than its other Big Four department store companions, Hutzlers built its reputation on outstanding merchandising and curation and the joy of finding something special. It was what made shopping fun and the experience consistently enjoyable. When its financial condition kept it from delivering that experience, consumers no longer had a reason to visit. Todays traditional retailers dont offer their shoppers that serendipity either. Supply chains and business models force financial constraints that, in turn, dont offer consumers the merchandise variety and frequency and uniqueness, which should give them incentive to shop their stores.

The problems are real, and the solutions are tough.

As a result, some retailers live in denial, clinging to the 92 percent of sales still happening in physical retail fantasy, while at the same time watching shopping foot traffic plummet dramatically over the last seven years.

Some want to blame Amazon for commoditizing retail rather than face the reality that when consumers arent offered a choice in physical locations, its just easy to buy from Amazon or another online retailer. And that brands, knowing this, adapt their own retailing strategies accordingly, reserving their best and most complete selection for the channels where they get traffic via their own physical or virtual stores or marketplaces where there is a steady and reliable stream of eyeballs.

Some just fiddle while Rome burns, implementing new technologies in an effort to make paying for stuff easier in their stores, when their real problem is getting consumers interested enough to buy from them in the first place.

But none of them, at least not publicly, will admit that maybe the best thing to do is to milk the asset for what its worth while the getting is good, and acknowledge that, like Hutzlers, nothing lasts forever. Sell off valuable assets, like Sears (NASDAQ:SHLD) has done with Craftsman, or real estate, like Macys is doing.

And recognize that they cant reinvent themselves so perhaps they should stop trying.

After all, businesses, like people, die. Only 13 companies on the Fortune 500 list are more than 150 years old: banks, insurance companies, consumer products companies and one retailer Macys. And nine out of every 10 companies on the Fortune 500 list in 1955 when it was first launched have disappeared.

Thats not all bad. It illustrates the vitality of business and the power of innovation. It shows what happens when we make room for strong, bold ideas that scale and usher in new paradigms. It demonstrates the ability of those strong companies to respond to the shifts in the markets that they grew up with instead of the struggle that comes when growing into those markets from a totally different starting point.

Especially when that reinvention happens too late in the process to change the outcome.

In his book about the history of Hutzlers, Michael Lisicky recounts a story of family heir, David Hutzler, who received a package delivered to his office by a mailman shortly before the Towson store closed. The mailman was said to have remarked to Hutzler, after he had expressed his profound sadness to him over the course that the family business had taken, but you did pretty good for 135 years.

Maybe thats not such a bad perspective to have.

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The Rise Of Retail Darwinism | Seeking Alpha - Seeking Alpha