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Taking Care of Customer Needs – EP8

In this podcast episode, DeAnn and I will explore two concepts: 1. How can Peloton generate more revenue growth by engaging its subscribers with software, and 2. Using Kohl’s and Sephora’s partnership as a case study on evaluating customers and their needs.

As usual, you can find this podcast episode on major podcast platforms: SpotifyApple PodcastsiHeartMediaAmazon MusicGoogle Podcasts, and Anchor.

Table of Contents

Transcript

Introduction

Hi, this is another episode of Retail Mashup. I’m Larry. And I’m DeAnn. We are here to talk about the intersection of customer experience in the retail industry and tie that to revenue management. How can brands maximize revenue and still make customers happy? In this episode, I’m gonna start and talk about Peloton.

Extending Customer Needs – Peleton

Larry
Peloton recently announced their quarter four 2022 results, and they came in above expectations on revenue, but they missed their profit guidance. However, that particular loss has been narrowed by a significant amount, and they are burning less cash. So that’s a great turnaround point for the exercise equipment manufacturer.

If we look into the numbers a little more deeply, we’ll find out that in fact, for the first time, they actually make more money in their subscription model than they did in selling the bikes, treadmills, and other equipment.

Moving From Hardware To Software Focus

Is Peloton now moving away from a hardware company to a software company? If it’s moving to a software subscription or exercise content-based platform, what does that look like in the future?

Peloton is developing new relationships with them on a daily basis, exercising and I wondered how far can they bring that forward. Can they build longer relationships with these people and convert anyone who has a subscription but does not have a Peloton bike into owning a bike?

I find that to be very interesting partially because their new CEO Barry McCarthy, he’s originally from Netflix and Spotify as an executive. He put a lot of effort into boosting the content. There are a lot of people who may have gotten exercise bikes from other vendors but they chose the Peloton mobile app and the content platform as the go-to place for their exercise needs.

Why Not Bring Subscription Customers To The Shop?

I also think about the shops that they have. I’m based in Toronto and Peloton has a shop in Yorkdale Mall where you actually can use both the treadmill and the exercise bike for half an hour. They even give you a changing room and towels so that you can exercise and take a shower after the fact.

Not many people know that particular showroom actually allow you to take classes. If I am a subscriber and I’m not using a Peloton bike, perhaps there are opportunities for me to look into those bikes and maybe take a class using one of the equipment for free.

I am not their app user, but I have seen the interface and I love the fact that they are able to bring in celebrity instructors. They are up to date with their music playlist. The classes are great for motivating people. I also really like how they have a reward system. If you achieve certain goals and objectives, then you earned accolades to make you feel good.

Peloton Data And The Customer

Maybe that should be translated into something. All that exercise data is important, not just for Peloton or for yourself. Could be great for research on understanding health and understanding how to use exercise as a means to manage your physical well-being. Perhaps this is a perfect segue for Peloton to work with health agencies to think about how to extend the way the Peloton subscription users are being motivated. Should they be included in some type of food-related products or maybe vitamins and supplements purchases?

If I regularly exercise, I would have a holistic system in place. I would want to eat better. I want want to live better. To do so would require that I think about things like drinking water, and sleeping the right amount of time. How is Peloton involved in those choices? Can they be involved in those choices too?

Collaboration Opportunities – Retailers

So that’s one part I was thinking about. The second part is really about their expansion with other retailers and hotel chains. We know that you and I talked that Lululemon is working with mirror and that Norstrom is working with Tonal.

Those two are exercise technologies that you can just exercise in front of a mirror and that’s great. They are able to capture alignment and, further revenue upsell. You go to a Lululemon store, you see a mirror there. You may be naturally curious.

Maybe you take a class, you love it and you want to buy it because it’s within the same demographics. So, Does Peloton have an expanded opportunity to work with a retailer or even another sporting goods store to really think about what else they can do to sell rather than just display?

They’re already on Amazon, and they’re on Dick’s Sporting Goods, but are they doing classes within those stores? Well, maybe not on Amazon, but maybe at Dick’s Sporting Goods. Rather than just showcasing the bikes like many brands would do, maybe they have to do one step further to entice people and tell people the value of Peloton, why it’s worthwhile to pay the premium over another similar bike, and ask people to come in as a subscription.

Colloboration Opportunities – Hotel Chain

I also like the idea of them working with the Hilton international hotel chain about motivating people who go and stay at the hotel. They go to the gym and be able to use the Peloton machine to continue their journey, their exercise journey.

Now the question is, I have status with Hilton but I have never seen any promotion notification from Hilton talk about the relationship with Peloton beyond a press release. Tell me as a status user, And going to the number of hotels that I’ve been to, which ones feature Peloton bikes.

Is it in all major cities? It doesn’t seem like they’re celebrating the relationship as they should be. In Peloton’s case, they are also not telling their users which Hilton hotels have their bikes. So that information becomes important because the more you get people using Peloton bikes anywhere, the more they can talk about it.

If they don’t know that it exists, they just choose not to exercise that day, that would be an opportunity loss for both the individual to stay on top of their goals with Peloton, but also not have the brand or the hotel. Really maximize the exposure that having the bike, treadmill, or rolling machine in the future has with the brand.

That’s my story. I hope they’re on an upswing using subscriptions, but there are definitely opportunities to make more money through the subscriptions themselves and do relationships with various companies or maybe even explore new ones within the luxury.

Say Yes To New Revenue Streams

DeAnn
Oh, that’s great Larry.

That makes so much sense. I would love to see Peloton kind of separate itself from the bicycle a little more. They’ve already got a line of treadmills. But once you buy one of those pieces of equipment, you’re kind of done for several years.

They’re not able to generate the revenue they originally thought with a strict hardware plan. I love what you said about them becoming a software company. I can’t help but wonder how they would do if they created a line of screens that could be attached to other types of exercise equipment. So you could have that Peloton content. A more comprehensive way with a broader selection of tools you choose to use.

Larry
That would be an interesting idea. Instead of selling the hardware, why not have someone else make the hardware but you control the screen content or sell the content directly to various exercise manufacturers so that content can be used to replace classes whenever classes are not available?

Allow people going to the gym to also buy a bike. I always feel like brands don’t extend that relationship fully. They tell you they exist, but then they don’t give you an opportunity to further engage and find out more about the brand or actually a test run the brand or buy it.

It’s like, “Okay, great that you told me my hotel room can have a bike, but I cannot take it home with me. I cannot buy one and get it shipped to my home through you and earn points at the same time.”

DeAnn
I hope they really think about themselves as a software company.

Larry
Think about the data they’re collecting and how they can motivate the millions of people already subscribers into being more active and tell people that they’re using the app for amazing things.

Kohl’s Collaboration With Sephora Solving Customer Needs?

DeAnn
Yeah, absolutely. Well, I’ve got a story to bring to the table. I was doing store walks last week.

Recap Of The Collaboration

I do them periodically and I’ve come across something that really struck me. Now, this is not something new. Sephora has had shop and shops inside Kohl’s for the better part of two years now and Ulta has placed a shop and shop inside Target. They’ve been open for about a year now. I was able to compare side by side by going to visit these types of locations on the same day so I could get a real sense of what’s similar and what’s different.

Cuz it’s really one strategy, create a major beauty retailer, creating a shop and shop experience inside of a more traditional department store. What is the difference between these two approaches? And it was fascinating. I started at Sephora. Sephora has a shop and shops inside the Kohl’s store. It’s a very enclosed, self-contained shop and shop. It’s almost like Sephora took their typical mall store, picked it up, and dropped it inside Kohl’s.

Spaced-In Feeling

There are walls around three sides. The walls are high, so you can’t see. Part of Kohl’s when you’re inside the space and the whole interior of the shop and shop is designed with the Sephora, black and white stripe branding, the shelves, the products, everything is exactly like you would see in a Sephora.

They even have their own checkout counter with a staff person, a staff person wearing black like they do in the Sephora stores. You are getting a true, full-on Sephora experience inside this store. That’s great because Sephora can control its brand standards. They can control what they show on their digital signage and the type of data they gather.

They can assist clients with beauty advice with their own trained staff person. It’s great for Sephora. The downside is that you forget there’s a Kohl’s just outside these walls and the items that Kohl’s stocks adjacent to this space really don’t align with the Sephora shopper. It’s an extreme disconnect.

Part Of The Experience Vs. Another Experience

You almost feel like you’re waking up or coming to something when you walk out of Sephora and you’re hit with this Kohl’s experience that is not in alignment either visually or with the type of products and merchandise they’re displaying. It is not in line with the type of shopper that would really seek out a Sephora.

Benefits Of The Collaboration – New Revenue?

I have been reading a lot of interviews, looking at a lot of the data and the reports put out by Kohl’s around this experience, and their plan was to completely re-merchandise and sort of redesign their stores around these Sephora outlets. But it doesn’t appear they’ve done that in the store, that I visited last week.

I know that Kohl’s isn’t really moving very fast on their store reorganization. They’re struggling to hit those revenue numbers and satisfy their shareholders. They’re fighting off some activist investor drama. That’s probably slowed down their ability to react and align their stores a little more careful with the Sephora experience.

I see a big benefit to Sephora because they wanna get out of enclosed malls. They want to be in open-air malls that are more in line with what Ulta has. But you can’t just go and set your Sephora store down in an open-air mall, two doors down from an Ulta because most malls have non-compete clauses.

The landlord isn’t allowed to let a direct competitor tenant into some of these malls as part of the contractual agreement of the original tenant. interestingly enough, in this open-air mall with Kohl’s in it, there was an Ulta right across from the doors to the Kohl’s store.

Why Does The Ulta Beauty And Target Partnership Work?

I could walk out of Ulta across the parking lot into the doors of Kohl’s and there was a full-on Sephora experience. I imagine they got around that non-compete by being inside Kohl’s. Which is helpful to Sephora, but really what is Kohl’s getting out of this? I have to question.

If their products don’t align with what the shopper wants, the shopping experience is really not up to the same par, I would say, as Sephora, are you just gonna walk out and keep on going to your next stop?

At the same time, When I went to Target a couple of hours later, the Ulta Beauty Shop is the diametric opposite of Sephora. It is fully open, with no walls. You can’t tell where Target stops and Ulta begins. A lot of Target products are placed on shelves in a way that would suggest they’re part of the Ulta experience. It’s Target’s way of getting their products, their own products in front of that. Ulta shopper.

Reward Programs Integration Impacts Sales?

The other thing I found interesting was that Target and Ulta have linked their loyalty programs. If you collect Ulta beauty points, you can spend them in target and you can combine your target and Ulta points as well, which is great. If you think about the combined power, I think it has about 32 million reward members.

Target has 50 million plus. That combined group of me rewards members is a marketplace powerhouse. It would be a juggernaut in the retail industry and give both Target and Ulta a lot of power when you look at someone like Amazon or Walmart. So I found that interesting that Sephora and Kohl’s have not merged their loyalty programs Target and Ulta have.

What also was kind of curious is while Target and Ulta are in complete cooperation in stores and even the products that are merchandised very much complement each other, the same doesn’t go, that that doesn’t extend back to Ulta. So while you can redeem Ulta beauty points at Target, you can’t redeem target points at Ulta.

Why hasn’t Target created perhaps a specialty line of products? Curated specifically for the Ulta customer, not in competition with Ulta, but things that are in addition to what Ulta says that round out the display like better makeup mirror or tools of some kind. Offer that for sale as a target product inside the Ulta Beauty store, to really take that last step towards combining those two companies and really maximize the shared value of that shopper.

What Do Customers Want?

Larry
It’s definitely a very interesting tale. Actually, two tales of partnerships, which we love, but one where integration and caring about the customer experience and more specifically the customer’s needs to ensure that it’s not an abrupt journey versus a very seamless journey. When Kohl’s tied up with Sephora, they thought it could generate 2 billion in synergies and increase sales. But the first thing people thought about, and that includes you and me, are their customers are the same. Do the people who go to Sephora, do they go to Kohl’s? If they buy things specifically in that store, within a store, would they go venture out and also buy more things?

DeAnn
That is still debatable. If you are hoping that a brand can save another brand, then we don’t have to look far and look at Sephora and JCPenny. Well, JCPenney also had Sephora stores, and that didn’t change their fate. They also went bankrupt. In this particular instance, over-relying on a brand with potentially different demographics, and different clientele maybe that’s not the best bet to lift revenue.

I think it’s all about the execution. When you look at Target and Ulta that shop and shop, as I said, is wide open. It’s hard to tell where one brand stops and the other brand starts. They have worked hard to create synergies. In addition to that the target shopper is very much in line with Ulta shoppers.

To your point, is Sephora the right customer for Kohl’s? I think it could be, but it isn’t today. Kohls, I think, knew that going in. Their plan was to update their stores. Use this as a catalyst to bring more attention to their stores and then at the same time, update their stores, and refresh their product.

When I look around and start digging into Kohl’s, they have some very high-end appliances. Small toaster ovens and things like that are very high-end. They have some nice brands. They stock Nike products. They stock Adidas products. They stock some Vera Wang kind of made for Kohl’s products.

There’s a lot they could be doing with the products they have. they’re mixed in too much with very low-end products, which I think detracts from some of the opportunities that they could have created with this Sephora experience.

While they have, I’d say maybe 60% of the products that they need and the type of things to align with a Sephora shopper, they’re not visually displaying it in a way that matches the Sephora aesthetic. They’re not zoning it properly. They’re not creating a good flow, and they’re isolating the Sephora experience from Kohl’s experience a little too much. You forget you’re inside Kohl’s and that’s not helpful to Kohl’s at all.

Larry
It’s almost like saying that gives people the feeling of you’re not welcome. This is just a rented space. It’s giving people the motivation to go in and leave. If you’re a Sephora shopper going to this space you don’t feel comfortable beyond that little space that you occupy. It’s almost motivation for you to buy and go rather than buy and explore.

DeAnn
Mm-hmm. the whole point of having that partnership is that you see synergy and part of it should be about telling people how is Sephora playing into the day-to-day life of a Kohl’s shopper so that people going into Sofar can see, oh, I can see myself shopping here. Mm-hmm. and,

The other thing that they didn’t do was bring the services that Sephora typically offers into Kohl’s. The makeup tutorials, education the makeovers, those kinds of things in a Kohl’s, where you could also try on an outfit, perhaps buy the whole package. Try on shoes while you’re there getting your makeover.

That’s not available at Kohl’s, and yet that would push shoppers to have a little more inter interaction with Kohl’s products. There’s really no motivation for that at the moment, which is a miss for Kohl’s. I think it’s an opportunity, that they’re if they don’t move on it quickly, they’re going to lose out completely, as did JC-Penny.

Larry
Great. And until next time.

Note: This transcript has been modified to improve quality and ease of understanding, as needed. While it is not a word-by-word replication, we preserved the meaning of the concepts discussed.

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