Macy’s Falls for Innovation’s Trap

January 5, 2017, 3:24 PM UTC

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten,” Bill Gates famously said in his book The Road Ahead. Exhibit A, which hadn’t even occurred when Gates wrote that sentence, was the 1998-99 Internet bubble. His wisdom is on display again as traditional retailing melts down before our eyes. Macy’s announced yesterday it will cut 6,900 jobs on top of 3,200 already scheduled to be cut this spring – more than 10,000 in all, and it will close about 100 stores. Also yesterday, Sears Holdings said it would close 104 Sears and Kmart stores in addition to 46 previously set to close and 50 closed in the past 12 months. For perspective, the company had over 3,500 stores in 2011; in a few months it will have fewer than 1,500. Plenty of other major retailers – Walmart, Limited Stores, CVS – have closed stores or are planning to.

What makes all this activity disorienting is that the recent holiday season was excellent – total revenue up by the largest margin in five years. Yet retail analysts say we should expect plenty more store closings this year.

We all know the explanation: e-commerce, loudly hyped since the Internet’s dawn but only now crashing through the ramparts of big traditional retailers. Leaders can draw two broad lessons:

-As friction comes out of an industry, it might just get smaller. Digital technology reduces information costs, transaction costs, and switching costs in every business it touches, and that’s a problem for companies that make money on the friction. In retailing, that includes companies that profited because customers couldn’t easily find a better deal or get to a competitor’s store. Amazon is the world champion at taking friction out; no other company comes close, and Amazon is lengthening its lead. The industry’s overall growth rate could slow even as consumers keep buying more stuff – and get more value as friction comes out.

-Many retail leaders fell into Gates’s trap, and you could too. When e-tailing’s early hype proved unfounded, concluding that online shopping would be just a niche was seductively easy. Many retailers, in line with Gates’s observation, then underestimated what would happen in ten (or 20) years. It’s understandable; pursuing a vision that won’t pay off for a decade or more will be unpopular with investors and the board, and many top executives know they’ll be gone in ten or 20 years. But good excuses don’t prevent industry carnage like we’re watching now.

What’s the next-decade revolution you’re underestimating?

You can share Power Sheet with friends and followers here.

What We're Reading Today

Forever 21, Amazon, others weigh bid for American Apparel
Potential suitors including Do Won Chang's Forever 21, Jeff Bezos's Amazon, and California retailer Next Level Apparel have begun examining financials in order to bid for the bankrupt retailer. Any bid would need to surpass the $66 million offered by Gildan Activewear. Reuters

Intelligence officials to testify to Congress
In a Senate hearing today, intelligence officials will explain why they believe Russians were behind the hacks of prominent Democratic organizations. The hearing sets up a battle between Republicans and President-elect Trump, who continues to discredit the officials' findings. CNN

China to Trump: Stop tweeting
An article from the country's official news agency, Xinhua, says Trump's "'Twitter diplomacy' is undesirable," and he should stop using it to conduct foreign policy. Trump and China's government have been trading jabs since his election. The Hill

Snapchat sued by former employee
Anthony Pompliano claims parent company Snap misled investors with fraudulent growth figures. Pompliano worked for Snap for three weeks and said he was fired for trying to blow the whistle on the growth claims. Evan Spiegel's company denies the accusations as it prepares for an IPO expected early this year. Fortune

Building Better Leaders

Best jobs in America
Mobile app developers have risen to the top position, earning great pay and choosing from many opportunities. CNNMoney

Find your chief AI officer
Baidu chief scientist Andrew Ng believes you need one if you want to extract maximum value from your data. Fortune

In offices that are less friendly to older workers...
…employees are 20% less engaged than at companies that embrace senior talent.  WSJ

Worth Considering

Hulu nabs CBS
Content from Les Moonves's CBS has been a long-sought prize for streaming services, but the company has instead opted to offer its own streaming channel. Now Mike Hopkins's Hulu has struck a deal to stream CBS programming, which will be included in new package of live TV. Los Angeles Times

Macy's to close 63 stores
After comparable store sales fell 2.1%  during the holidays, Terry Lundgren's Macy's will shut 63 more stores by spring and cut 10,000 jobs -- even though Macy's online sales grew by a double-digit percentage over the holidays. Fortune

Amazon to open NYC bookstore
Jeff Bezos's company will open its fourth bookstore in the center of the publishing industry in New York City. The 4,000-square-foot store is expected to open this spring and will add to Amazon's small but growing brick-and-mortar presence in retail. WSJ

Up or Out

Coach has tapped Kevin Wills as its CFO.  MarketWatch

Fortune Reads and Videos

Google CEO Sundar Pichai thought Gmail was a joke...
...when he first interviewed for a job in 2004. The interview was on April Fool's Day, and Gmail had been released hours earlier. Fortune

Uber's rival in Brazil, 99Taxis, grabs $100 million... funding from Didi Chuxing, which will also take a seat on the board. Fortune 

Researchers develop medicine that can be activated... light. Potential uses include reducing risk of infections and limiting the need for anesthesia. Fortune

IBM researchers foresee "superhero vision"
In their annual list of technologies ready for broad adoption, IBM researchers say hyper-imaging technology will enable devices to see far beyond what's currently visible -- seeing through fog, for example, or looking at your food and determining its nutritional content. Fortune

Quote of the Day

"Seek people who can work cross-functionally and have skills to take shiny [new] tech and contextualize it for your business...You can’t just download it and bolt it on to an organization, [which is why] there’s a talent war for AI...[It] is the new electricity." -- Baidu chief scientist Andrew Ng.  Fortune

Produced by Ryan Derousseau

Share Today's Power Sheet:

Read More

Great ResignationDiversity and InclusionCompensationCEO DailyCFO DailyModern Board