On the corner of 7th Avenue and 12th Street in Manhattan is a fruit and vegetable cart. Others just like it are scattered across New York City. They tend to be run by hardworking immigrants willing to stand up all day and put up with whatever weather comes their way. I’ve passed this stand thousands of times as I walk to and from work. Last fall, I stopped for the first time noticing that the same blueberries and blackberries that have now become my breakfast staples were cheaper than in the grocery store down the street; the same box and brand, but 25% less.

In retrospect, it makes perfect sense since my grocery store pays more in rent than the street vendor does. It wasn’t just that the berries were cheaper; when I actually compared the other fruit and vegetable prices, everything else was too. I started buying avocados, eggplant, onions and melons. Not only was it cheaper, but it was more convenient. Yes the selection was narrow, but it met my needs. The vendor was friendly, and his name was Ali.

In my first transaction, I realized that the sales protocols were different. I understand the self-service routine of the farmer’s market where you pick over and select what you want to buy in the midst of other frenzied Saturday morning customers. Ali, on the other hand, rarely takes care of more than one customer at a time. He doesn’t like you touching before you buy. He curates your purchase for you. He asks when you are going to eat something, what you are making, and will make suggestions; plus he will not sell you anything that isn’t ripe enough.

It is always a polite exchange, and even when I don’t stop by, I get a friendly nod of recognition. It has become one my beacons of humanity as I move through my neighborhood. I haven’t stopped going to the grocery store or the farmer’s market, but Ali has received a piece of my weekly budget.

The grocery industry is in trouble.

Everybody else is targeting grocery customers. Sales in the grocery ‘Center Store’ for non-fresh food products have declined with each passing year. The convenience store business has done a good job overcoming the perception of higher prices and lower quality. Many of the major drug chains have expanded their food offerings. Some specialize in single-serve and expanded dietetic offerings. Dollar Store and mass merchants have chomped off pieces of this business as well. Costco, Trader Joe’s and Aldi have taken their bits, too. Ask Millennials where they do their shopping for food and household supplies and you’ll get a list of eclectic locations, on and offline.

It isn’t just the chains and alternative channels that are offering new options. The Farmer’s Market movement, which 10 years ago had a 50% failure rate, has stabilized with some 8000 markets across the country. Project for Public Spaces, a non-profit in New York City, runs a training program for farmer’s market managers. The markets themselves have improved, as small farmers have learned more about the customers they serve. My market in Abington Square in the West Village on Saturday mornings has some 15 stalls, with everything from bread, veggies and fruit, to artisanal cheeses and mushrooms. The farmer’s market is fun and interactive. Even CSA, community supported agriculture, has made its inroads into big cities.

And it isn’t just North America where the grocery store is under assault.

Across many emerging economies, organized retail started with grocery and hypermarkets. In Argentina and Brazil, modern supermarkets took fewer than 10 years to dominate food distribution; they offered hygiene, safe parking lots and international brands. But even in South America, traditional farmer’s markets have been on the upsurge. They have looked at the grocery store and improved their merchandising. Often, vegetables and fruit are pre-bagged and simply priced. The transaction is quick and easy. Many of traditional street markets are immediately adjacent to public transportation. It’s a new version of grab-and-go. Just like Ali’s fruit stand for me, it’s convenient.

The big, traditional city-center markets have also cleaned up their act and added value offerings like smoked meats, small-batch pickling, and even “fresh” or “new” wine sold by the jug. In spite of challenged parking and security concerns, they have become a destination, almost like the shopping mall was 20 years ago, but with a new sense of authentic charm, with tempting smells and sounds.

In the face of so much competition, where is American Grocery Store innovation? In mainstream America, we have no true national chains. Neither Kroger nor Walmart have the same presence as say, Tesco in Britain, or Carrefour in France. Both Walmart and Kroger have had their butts kicked as they have tried to invade markets with strong regional players, like HEB in Texas, Wegman’s in upstate New York, and Meier’s the Midwest.

The big regional American players have built superstores that duplicate the European hypermarkets. All of them have aggressively built private label brands and localized their mix of offerings. Many have the advantage of being privately held, which has sheltered them from vapid shareholders looking at quarterly results. The regional chains seem to operate more consistently store to store, unlike Walmart and Kroger where the strength of the individual store can vary greatly. Part of the success of Whole Foods is that it functions like a series of regional businesses. Company headquarters may be in Austin, but the regional offices do much of their own buying and control their own destinies.

What is the future of grocery?

About 80% of our weekly purchases are routine. After a certain age, we have landed on the brands of juice, butter, yogurt and mustard we prefer. We have settled into our choice of laundry soap and bottled water. Yes, we may vary our purchases by season or occasion, or buy on deal, but our basic brand palate remains the same. But what if our kitchens could order for us? What if replacement was driven not by highly-merchandised shelf presence, but by storage efficiencies and easy recycling? I am not bullish on the long-term future of the supermarket, as we know it, along with the consumer packaged goods companies that rely on them for distribution. There is change streaming into the pipeline. We like the experience of buying fruits and vegetables, there is some sensual pleasure to it; but walking down the laundry aisle or staring into the milk cold case? These commodity products could easily be replenished automatically through smart appliances that interface with online grocery orders.

Years ago at a retail conference in Istanbul, I heard a street vendor talk about how he organized his offerings. He knew which way the eye scanned his cart and the order in which a buyer thought about selecting produce; lettuce is always bought first, then the tomatoes and cucumber. He talked about sun angles and how he repositions his cart from morning to afternoon. It was a brilliant, simple string of merchant logic.

The unstoppable marketing professional I am, I tried last fall to help Ali rethink his signage. He smiled and took me for a Village idiot. He is just fine with his simple approach. And I predict I’m going to short A&P and Kroger over the long term. Ali is going to do just fine.

The media at large has publicly exposed enough of the “dirty” part of this “jokester” that I don’t need to pile on more. Although it might be a more titillating read to add more dirt to the pile, I’ll just sign off on his disgusting behavior during his tenure as CEO of American Apparel by saying it’s equally disgusting to me that the board didn’t kick his butt out of there a long time ago. It never ceases to amaze me that too many boards are still weak on proper governance in protecting the shareholders from the egregious, deleterious behavior of miscreant CEO’s. And American Apparel’s board seems to be one of those.

But for the moment, let’s forget about Charney’s sexual proclivities, including allegations of abuse. Many top executives have been caught with their pants down, so to speak, albeit not all as flagrantly as Charney. Many were fired, yet many others have just had their dalliances swept under the rug.

Charney’s real dirty joke is that he is a business joke of the tallest order.

A Business Joke

Reluctantly, I feel it’s necessary to acknowledge Charney’s entrepreneurial accomplishment in creating a brand that hooked up with (no pun intended) young urban consumers in a sensuously charged way. It took off and spread like wildfire. It was at that moment in time when Charney should have removed himself from running the business and hired a CEO with management, operating and leadership credentials. Entrepreneurs, by definition, are creators and most often are not capable of managing and profitably growing a business. Charney is no exception.

Not only has he proven to be an inept CEO, given the continuing decline of the business (propped up by one loan after another), his maniacal micromanagement of every aspect of the operations has decimated whatever semblance of an organization there might once have been. Worse, his “everyone reports to Dov” insanity has driven off all of the skilled executives he briefly had. One example of his warped behavior was reported in a New York Times op-ed column by Joe Nocera: “In 2007, after the company went public and he had to bring in a chief financial officer, he told The Wall Street Journal that the man he hired was a ‘complete loser,’ which of course caused the man to quit.”

Anecdotally, anonymous observers provide a disturbing picture of his dysfunctional, really whacky, abusive management style and hodge-podge approach to a retail business. Here’s one observation: “There is no retail management for the 250 or so stores. Everyone reports to Dov, from the assistant store manager in Cincinnati, to the visual display assistant. Dov conducts a meeting generally from his bedroom every week. He has every store call in. Seoul Korea calls in. Santa Barbara calls in. Berlin calls in. Lots of time differences … and languages … but the one constant is that Dov does all the talking. If business is bad in a store, it becomes a weather report by Dov: ‘Toronto, your business was terrible! it rained (or snowed, or was hot).’ …Any reason for slow business was due to the weather. And the solution was always the same: ‘Toronto, if your business doesn’t improve next week I’m coming up there and cutting off your (expletive).’

“There is no allocation department. That area is the lifeblood of specialty retail. So, instead of an algorithm for allocating, it is all Dov: ‘Send 5000 to the stores! Its gonna get cold soon so we need to send a lot of jackets to the stores!’ Product development is all done by Dov, as well. Nail polish is made in downtown LA. It is not FDA approved, and several bottles have exploded.”

Another anonymous comment: “Dov’s favorite lines to his employees: ‘I’m gonna make you bleed. I’m gonna break you in half. You’re a fraud.’”  It is all Dov, all the time. There is no one else running the store.

Another blatant example of abusive behavior towards his employees, and one for which Charney is being sued, was reported in a recent Bloomberg Businessweek article: “In November 2012, Michael Bumblis, a store manager in Malibu, had accused Charney of rubbing dirt in his face because Charney was displeased with the store’s condition and performance. Bumblis’s lawyer, Ilan Heimanson, says he informed the company of evidence of the confrontation beyond the accounts of witnesses. The stores had security cameras, and Bumblis had access to the video. Among the details in the complaint was a phone call Charney had supposedly made to Bumblis about his store’s poor sales. ‘Get your f-?-?-ing s-?-?- together, fag. Where is your f-?-?-ing creativity? Get some f-?-?-ing girls in bikinis to stand on PCH [Pacific Coast Highway] and have them wave a f-?-?-ing American flag. Are you a fag? Do you not want to see girls in bikinis? Are you banging that girl you were with in Vegas? What’s her name?’ American Apparel’s lawyer said in a filing that Bumblis was a poor-performing employee who was dismissed and that his story is ‘entirely contrived or wildly exaggerated.’

The article went on to say: “That case could bring other complications. Heimanson asked a Los Angeles court to try the case rather than send it to confidential arbitration, as American Apparel requires in all such matters. The judge ruled that the documents all American Apparel employees have to sign are ‘unconscionable,’ according to legal filings. The agreements forbid workers from filing claims against the company, talking about the company, or sharing any information about the personal life of the CEO. If they do, they risk being sued for $1 million. The company is appealing the ruling. If it stands, ‘we’ll be able to shine sunlight on the backroom dealings of American Apparel and Dov Charney,’ says Heimanson.”

The Unravelling

Following its IPO in 2007, Charney put his ambitions on steroids along with his chaotic, micro-managing behavior. This combination of a publicly traded company being run by an overzealous entrepreneur with zero management skills with a looming recession was bound to become a train wreck. A tipping point likely came in 2009 when an immigration audit forced him to lay off over half of his illegal factory workers. The subsequent disruptions to the business while replacement workers were hired and trained just exacerbated the declining business.

Between 2009 and 2013, the business consistently hemorrhaged money in addition to taking on costly debt, ballooning from under $100 million to around $250 million. In the last three fiscal years, American Apparel lost $270 million and its stock traded for under 50 cents earlier this year, down from $15 at the end of 2007.

In 2011, Lion Capital, one of American Apparel’s major lenders and a Charney supporter at the time, urged Charney to hire an experienced C-level apparel executive to stabilize the business, reorganize the infrastructure and operating functions, and to strategically put the business on a profitable growth trajectory.

Obviously in an attempt to protect their interests and ward off a potential disaster, Lion Capital reached out to Marty Staff, former successful CEO of JA Apparel (owner of the Joseph Abboud brand) and previously, CEO of Hugo Boss. In my opinion, Staff was precisely what Charney needed to turn the business around.

It was a doomed relationship from the start. First of all, Charney gave Staff the title of President of Business Development. And as I wrote in an article for The Robin Report upon Staff’s departure after only six months on the job, (American Apparel: A Last Chance Lost) that title didn’t even imply operating authority. Charney just continued to micromanage every part of the business, and Staff got frustrated and left. This is not unlike the turnover of many other capable operating executives who wouldn’t put up with the tumultuous and chaotic working environment where it was impossible for them to develop and implement sound strategies for achieving growth.

I also wrote in that October, 2011 article: “Quite frankly, it amazes me that as CEO of a publicly owned company, given American Apparel’s financial condition and his questionable and storied behavior, Charney still has a job.”

Indeed, Staff was a “last chance lost” as American Apparel continues its downward spiral.

Enter The Money Guys

Now the money guys are circling. Lion Capital is demanding payment of its $10 million loan at 20% interest. Following his ouster by the Board, Charney requested New York investment firm Standard General to do a financial deal, which he hopes will be a mechanism to reinsert himself back into the business. And I guess Standard General believes there’s still a viable business that if turned around, could end up being a smart investment.
Standard General’s deal with Charney provides an immediate infusion of $25 million to shore up American Apparel’s financial mess, including repayment of the Lion Capital loan. Charney gets to keep a 43% share in the company but relinquishes his ownership control to Standard General. His fate for returning in any capacity to American Apparel, including reinstatement to the Board, is pending an investigation into his conduct and alleged wrongdoings. The deal also includes a commitment to continue manufacturing the apparel in the US, which has been a strong marketing position for the brand from its inception. The Board will be recast and, amazingly, Charney will be a paid consultant during the investigation period.

My Advice: Dump Charney

My final perspective amidst the cacophony of the media storm around this dirty business and dirty joke is one of disgust. Lion Capital and Standard General as well as all other funding sources that have thrown money down this cesspool ought to have their heads examined. I’ve been around long enough to know that most investors, no matter how deeply they analyze companies, don’t have a clue as to how businesses are run. The “numbers, the numbers, the “numbers” is their war cry. At the end of the day, it’s not about making a better America, about creating real value, or about improving the economy. It’s about making money.

Okay so be it. We live in a capitalistic economy. But from day one when Dov Charney luckily hit on a hot idea, all anybody with any common sense had to conclude was that it was not ever a question of whether American Apparel would collapse under his ineptness. It was only a question of when.
And now that the end is near, it’s equally incredible to me that Charney is being kept on on as a consultant, or even as janitor, as he so flippantly suggested to the press. Whatever his capacity, he has demonstrated from American Apparel’s opening day that he is not only an abusive micromanager, but also incapable of sustaining profitable growth.

Regardless of the outcome of the current investigation, if the American Apparel brand has any chance of being turned around, I advise the Board: Open your eyes and dump Dov Charney. Now.

In the land of the brand, the Holy Grail, surely, is building a brand that’s universally known and is in constant mention by consumers.

Or is it?

There’s such a thing as too much familiarity. There are more than a few instances of brand owners losing legal possession of their own brand because they became generic descriptors of the product, sometimes with dire consequences for its erstwhile owner.

Now, in an interesting lawsuit filed in US district court of the Southern District of New York, Tiffany is in legal battle with membership retailer Costco about the appropriation of the Tiffany name by Costco. There’s some reason to believe that while the facts would seem to strongly favor Tiffany & Co, it may not be the victor, at least not in a narrow legal sense.

But first, let’s take a look at how brands can evolve into popular vernacular, to the degree that their ownership is snatched from their creators.

Among a number of examples of brands lost in legal action are thermos, escalator, linoleum, videotape, and yo-yo. In the last instance, the Duncan Toys Co. went bankrupt when it lost control of its trademark. Also in the litany of lost brands is aspirin. That brand was once owned by Bayer, a German company, but it was awarded as war spoil after World War I. So it became a generic term in the US, the UK and France. In other parts of the world, Bayer still defends the use of its Aspirin brand. Curiously, Bayer also lost the right to its Heroin brand under the same circumstances. It hasn’t seen fit to defend it. Yet.

Numerous other brands are teetering perilously close to becoming generic terms, brands such as Scotch Tape, AstroTurf, Jacuzzi, Band-Aid, Frisbee, Hoover, Taser and Rollerblade.

To be sure, prudent brand owners take a range of actions to defend ownership of their brands. Milder steps include issuing letters to offenders, such as publications, reminding editors about trade names. Owners are particularly sensitive to use of their brand name spelled without a capital letter. As past editor of a major trade publication, I received countless letters from brand owners reminding me about correct usage, even when no error had been committed. Brands often ran paid ads to remind the trade who owned a brand. These activities can be seen as setting the stage for a lawsuit, should one be required.

Of course, lawsuits are filed, even for comparatively minor offenses. For instance, Faberge has sued the owner of a restaurant in Brooklyn called “Faberge.” The restaurant also appropriated Faberge’s purple color motif and has menu items such as “St. Peter’s Kabob” that are evocative of Faberge’s Russian heritage.

This brings us to the matter of Tiffany and Costco. For many years, Costco sold a particular type of engagement ring as a “Tiffany ring.” When this came to the attention of Tiffany, it filed suit. It would seem that Tiffany should be on firm ground, especially since, like Apple, it controls the entire process from product and package design, to manufacturing and to its own retail stores. Maybe not. Costco argued that the particular Tiffany ring setting featuring a pronged diamond setting, which Tiffany first produced in the 19th century, had devolved to become a universal descriptor and wasn’t really Tiffany’s to control any more. Costco said its own ring vendor and other retailers follow the same practice.

In an early ruling in the ongoing court battle concerning Costco’s claims, a judge said “a genuine factual dispute” exists about whether the Tiffany trademark has taken on a generic meaning in the minds of consumers. That could be very bad news for Tiffany and, by extension, other brands.

Despite that encouragement, Costco subsequently discontinued use of the Tiffany name to describe the ring and has offered refunds to any consumer claiming to be deceived by the ring’s description, possibly to contain the size of the judgment should it lose.

Indeed, Tiffany continues to press its lawsuit by seeking a court order that forbids Costco from using its brand again and — in a bit of overreach — wants disgorgement of a portion of all of Costco’s profit, even profit from the sale of products totally unrelated to jewelry, such as gasoline, food, clothing and memberships.

Doubtless, Tiffany wants to put the trade on notice that there’s a high price to be paid for seizing its brand.

As we look out years into the future, it’s possible to see now-solid brands that might slip into generic usage; brands such as Coca Cola (or Coke), Google, Twitter and maybe even Apple’s iPhone. Apple is fortunate that no one calls computers “Apples” in a broad sense.

How bad is this news for brands? It’s very bad since for many companies, its brand is by far its most valuable asset. Loss of exclusive brand ownership spells doom for many companies. For Tiffany, loss of the Costco lawsuit could render its Tiffany engagement ring all but worthless. Look for brand owners to remain dedicated to the fight for the right to their own brands. After all, as we’ve seen in The Robin Report, brands are in enough trouble already.

In all likelihood, only Novak Djokovic logs more court time than the corporate counsels of beauty brands in possession of a true rarity; an original idea. Breaking ground in a new category of product? Be prepared to spend your days fending off a slew of increasingly shameless copycats.

Flashback to 2006: An obscure “hair oil” – created not by an A-list coiffeur, but by under-the-radar Montreal salon owner Carmen Tal – starts trickling into the public consciousness. It’s derived from the nuts of argan trees, which are indigenous to Morocco, and is laced with hair-soothing fatty acids. Sure, argan oil is good for other stuff, like preventing heart attacks. But who cares about that when it can deliver livelier, lusher locks?

Dubbed Moroccanoil, it’s piped exclusively into the salon distribution channel and quickly explodes though other sales platforms. And over the next five-plus years, a steady parade of shockingly similar products tumbles into the market. Some of these copycats co-opt the “Moroccan” idea, some push the argan angle, and still others – the most egregious of the lot – hijack the real McCoy’s signature turquoise blue packaging along with the Moroccan idea and the argan angle.

Designer Imposters: Not Just a 70s Thing

Members of the Moroccanoil Wholesale Hijacking Club include Rusk Deepshine Oil, Organix Renewing Argan Oil of Morocco, Avon Advanced Techniques 360 Nourish Moroccan Argan Oil, and Carino Miracle Oil with Argan Oil.

The makers of the latter two imposters – Avon and Aldi, a UK supermarket chain that manufactures the Carino Miracle Oil – recently found themselves in court for their efforts.

After Moroccanoil Israel Limited (MIL) challenged its trademark and too-close-for-comfort overall look and packaging for its Advanced Techniques argan products – dead ringers for Moroccanoil — last November, Avon, in full-tilt Goliath mode, smacked back hard.

Its Advance Techniques line was launched waaay back in 2000, Avon stated in its Defendant statement. Fair enough. But when were the Advance Techniques Moroccan Argan Oil products launched? After Moroccanoil blew up, of course. (Not much blows up in the cosmetics industry anymore; when something does, everyone takes note.)

Another Avon legal tack: MIL didn’t invent argan oil. Or Morocco, for that matter. Again, fair enough. But wasn’t MIL the first to put the whole she-bang together? And wrap it up with a perky turquoise bow?

Because Bigger Is…Better?

Avon also trotted out this nugget, although it isn’t abundantly clear what this has to do with anything: “Since long prior to the acts of defendant complained of herein, Avon has earned a reputation as one of the world’s most reputable products and distributors of cosmetics, fragrances, toiletries, jewelry, clothing and related beauty and wellness products. Avon is renowned both for the quality of its products and its unparalleled customer service.”

The net-net of the struggling direct sales giant’s argument against the (much smaller) Plaintiff: We’re Avon. Get over it.

And guess what? It worked. After back-and-forthing in the US District Court for the Southern District of New York, and plenty of pow wows in global trademark offices, the two parties settled this past July for an undisclosed amount.

The June 2014 outcome of the MIL vs. Aldi suit — for those of us who like to see the creative, prescient “little guys” come out on top – is even sadder.

Although the judge in London’s Intellectual Property Enterprise Court (IPEC) ruled that Aldi had made the conscious decision to mimic Moroccanoil’s packaging – with the express intent of making customers think about Moroccanoil when they saw the Carino product parked on store shelves – the public wouldn’t confuse the two products, nor think that Moroccanoil actually manufactured the Carino product.

So, in other words, Aldi was pretty good at copying Moroccanoil, but not brilliant enough to actually trick Jane Q. Wants-Better-Hair.

Coming at roughly the same time as the Avon dust-up, this turn of events didn’t go down well with Team Moroccanoil. “We were obviously dismayed by, and furthermore fundamentally disagreed with, the IPEC’s initial ruling,” says Anthony Wilson, the company’s General Counsel for the Americas. (After considering an appeal, MIL settled with Aldi.)

Picking Your Beauty Litigation Battles

Unfortunately for MIL, fending off Moroccanoil copycats is just one legal front on which it fights; from the brand’s inception, it has battled, big-time, against diversion.

Ask Wilson which is the bigger priority — stemming the tide of wannabes or protecting salon owners from seeing Moroccanoil everywhere it isn’t supposed to be – and he’s reluctant to choose.

“Both lay at the heart of Moroccanoil’s brand protection strategy, and so we focus on each as much as possible,” he says. “Thankfully, each are the result of being a brand in high demand, and neither will abate so long as such is the case. That said, given the resources that we have invested in aggressively fighting diversion, and the length of time that we have been doing so, we are starting to see a slowdown in the rate of diversion of our products. Time will only tell whether our strong commitment to fighting these knockoff artists will meet with the same kind of success.”

At the risk of sounding the death knell on originality, that’s unlikely to happen. One need only take a quick glance at the shelves in a cosmetics department – in either the mass or prestige channel — to know that copycatting is getting much worse. A fall 2014 case in point: all the Clarisonic-wannabe skin brushes hitting the market right now. Even Clinique, a path-breaker if ever there was one, is getting into the skin brush act.

Still, you have to hand it to the pioneers for continuing to raise a ruckus when their hard work gets co-opted lock, stock and barrel. And for logging all that time in court when they probably like to be just about anywhere else.

Brazil is more than just football!

Interesting fashion can be found in every corner of the globe and Brazil is no exception. Compared with China, Brazil has had far less attention from global brands. But that’s changing.

As I’m typing away on my flight from Rio de Janeiro to Sao Paulo and reflect on my trip so far, it becomes more and more apparent that the fashion industry here is set to explode in more ways than one. It is primed to be both impacted by global forces as well as make an impact on the world stage with more than just flip-flops and bikinis.

“B” as in BRIC

Brazil is the fifth largest country in the world with 200 million people, half of whom are under the age of 30. It is becomingmore urbanized as millions of people have transitioned from poverty to the middle class. Brazil has a $54 billion apparel market that’s expected to keep growing, and by 2020, almost half of apparel spending will come from its smaller cities.

The country is ripe with opportunity. But big, global brands must make note of certain realities when evaluating growth prospects in this region. Brazil has a long and rich culture, with very distinct regional differences —from the German influence in the South, to the free and laid-back attitude of Rio, to the rain forest.

Morphologies all vary widely. While there are plenty of J-Lo curves and health conscious people to be found, not everyone has Giselle’s slim, model perfect body. Men dress smartly and women go to great lengths to emphasize curves on the lower half of their bodies with less attention paid on top.

Inversed seasons—and yes, it does get very cold—mean that to serve Brazil apparel needs well and better targeted fashion collections. And stilettos? Forget them! I learned very quickly that they are for indoor use only due to the mosaic stonework in the sidewalks and the steep hills. If there is an enterprising shoe company out there, Brazil is surely a huge potential market for pliable, lightweight ballerina shoes that can be stowed away in a purse after arriving at one’s destination.

Retail Challenges

The retail market is still relatively undeveloped, with a low number of square feet of physical store space per capita — estimates indicate that it is around 10% or less. And here’s the good part: Brazilians love to shop and they love fashion.

Going to the mall is still fun here; it is to see and to be seen. The shopping experience is much more than just purchasing goods; as Carlos Jereissati Filho, president of the Iguatemi Group once said, “Service has become a crucial factor in Brazil.” That being said, based on my retail experiences here, there is a lot of room for improvement in this area, as the sales people in stores seem disinterested in the customers.

High taxes and complex governmental administration requirements make Brazil a daunting region. Euromonitor International estimates that apparel vendors pay an estimated 35% in taxes on their products, compared with about 8% in the US. Import taxes can mean another 35% for those retailers shipping their products into the country. Brazil is one of the costliest regions for manufacturing, and there is talk of an impending economic slowdown.

It can be difficult for international brands to build up a presence here when facing this type of tariff environment, not to mention the language barriers. Brazilian, they assure me, is not the same as Portuguese. Regardless of these complexities, people are optimistic and positive.

Global Brand Vacuum

Despite entries by Gap, Desigual, Top Shop, Forever 21 and top luxury brands, Brazil still lacks many of the popular global brands available in other emerging markets. Uniqlo and H&M, for example, have not yet made their entrance—but will be doing so soon. Foreign brands in Brazil are often expensive, costing upward of 50% above the retail prices of comparable items in the US. One thing of note: after wading through approximately 20 local brands, based on the labels, we only saw three countries of origin: Brazil (the majority), China (goods that leaned toward basics) and India (pretty much beadwork or embellishments only). Brazilian fashion brands dominate this market. They are fun. They offer decent quality, great colors and are not the same stuff that we find over and over everywhere else in the big box, homogenized stores. Animale, Dudalina, and Lança Perfume, among others, have grown significantly within the country. C&A and Zara both design and produce here, no doubt to cater to the local tastes and sizes, but also to be able to turn over trends quickly. Brazilians are very trendy, fashionable people on the whole. But watch out; the styles and cuts are unique to the area so setting up a local design (and sourcing office) is likely needed.

Brazil’s Apparel Evolution

One of the unique things about fashion in Brazil that could potentially do well on the world stage is that it is still relatively vertically integrated. There are more than 26,000 fashion and apparel companies including big groups like Malwee, Guararapes/ Riachuelo, Lunander, Grupo Kyly and Hering, all hailing from the south, that produce textiles and apparel. These guys also have their own brands and run their own retail operations.

Brazilian companies are becoming increasingly modern and cutting edge. In fact, every company and fashion school that I ran into during my 12-day trip (including the busiest trade show I have seen in years, four domestic flights, a bus ride and numerous treks by car and foot) is undergoing some sort of modernization. There are many environmental and corporate social initiatives already in place, and several companies are implementing lean manufacturing programs (or have already done so). In case you are wondering, many of these companies are privately-owned family businesses that have set out a charter of slow and steady growth. Keeping it in the family, they have consistently reinvested back into their businesses and their people.

One caveat is that fashion education is currently a weak point, although the schools are full of young fashionistas wanting to study design, since it’s a much more glamorous profession than patternmaking or production. But there are strong signs that the government is stepping in to help sustain the industry. Senai Cetiqt, in Rio de Janeiro, is undergoing a major transformation. The school offers an end-to-end education including fashion and textile design and apparel production (and everything in between). It is becoming a technology showcase for the industry, undergoing a $30 million update.

Business Playbook

So, what’s next? Brazilian brands could very well be eyeing expansion on a global scale. Brazil’s knowledge base and manufacturing infrastructure, combined with its unique cultural identity and creative aesthetic, give it a potential that we haven’t found in other regions of the world.

And for those global brands eyeing Brazil as a source of growth, they must take note that Brazil is a large, diverse nation. Its citizens are hungry for global brands, but they must be served with relevant, differentiated products. Companies must maintain a keen eye to this reality, adjusting the brand positioning appropriately and tailoring product to the needs of such a dynamic population.

They must also decide if local production or partnership with a domestic player makes sense, and whether to explore the growing but relatively untapped e-commerce market.

Economists, experts, analysts, consultants, a lot of CEOs, casual observers and even my friend and CNBC regular Jan Kniffen believe lower gas prices are going to goose holiday retail sales. In what some call the “gas bonus,” this means that some $40 billion saved on fuel will end up being spent over the holidays in the nation’s retail stores. This is certainly a happy thought. On a CNBC panel the other day, Kniffen was almost giddy about it. And then when you add in a falling unemployment rate, followed by an increase in consumer confidence — at its highest level since 2007 — stock traders are already chilling the bubbly.

Once again, I find myself the naysayer. Let’s start with the gas theory. The Robin Report Chief Strategy Officer Judith Russell looked at the monthly change in gas prices and retail sales for the past eight years. And as indicated in the chart below, there is neither a significant bump up, nor down, in retail sales accompanying rising or falling gas prices. She even looked at regressions with different segments in retail, and found that there simply does not seem to be a correlation, period. In other words, the gas theory is an empty tank.

Having said that, Walmart had a slight increase in third quarter sales of .5%, for the first time since 2012, which they believe was partially due to lower gas prices. So, one may conclude that the entire discount sector will gain from the gas bonus, putting more cash in its lower-income consumers’ pockets. On the other hand, one might conclude, as I did, that Walmart is clawing back its customers whom they lost to the thousands of smaller neighborhood dollar stores during the recession when gas prices were high and low-income shoppers had a shorter ride to those local stores, thus saving fuel costs. In fact, Walmart said in its 3Q conference call that the Walmart Express strategy (smaller footprint convenient neighborhood stores) is beginning to facilitate their clawback of market share from the dollar stores.

Therefore, this hypothesis would suggest that rather than the gas bonus lifting total spending among low-income consumers across the entire discount sector, it’s simply shifting shares around within the sector.

Click to Enlarge

If consumers do take their fuel savings and decide to spend them, while the discount retail sector may minimally benefit, it’s more likely they will spend more on health care and entertainment, as well as home improvement. And since income growth is flat, they could just as well decide to save the gas “bonus.” In fact, the savings rate has been ticking up.

And there was certainly no additional gas bonus spending among the mid-to-higher income consumer segments. In fact, Macy’s CFO, Karen Hoguet told analysts a week ago, “shoppers are spending more of their disposable dollars on categories we don’t sell, like cars, health care, electronics and home improvement.”

Lastly, the low overall inflation rate, even disinflation in some major merchandise categories, is allowing consumers to get more value for their money, which doesn’t result in an increase in sales, because they’re not buying more stuff per se. Consumers and particularly the growing Millennial cohort are shifting toward a “less is more” mentality, eschewing buying more stuff to seeking more experiential satisfaction out of life, which is why restaurant sales and entertainment spending are strong. And now with a strong dollar, we might see people opt to travel more often. So these dynamics, much of which has to do with a demographic and cultural shift, will also divert any part of the gas bonus that might have made its way into mainstream retailing.

The final word: dream all you want about getting your hands on a piece of the $40 billion gas bonus, but when you wake up on January 1st with a hangover, it won’t be due to the bubbly that the stock traders are currently chilling. It will be due to the fact that the dream was really a nightmare about the passing gas bonus, pun intended).

What’s more mainstream-American-beauty than Christie Brinkley? Christie Brinkley selling her upcoming face and body de-agers on HSN, that’s what. And for an extra dose of apple-pie wholesome, how about a Christie Brinkley beauty counter at Kohl’s?

But here’s what isn’t so by-the-book about Christie Brinkley Authentic Skincare: just like the 60-year-old stunner herself, it’s 100 percent anti-animal cruelty. In fact, it’s vegan. As a decades-long vegetarian and staunch wildlife advocate who spearheads anti-poaching missions in Africa, Brinkley made damn sure her eight-SKU range doesn’t contain a trace of animal anything.

If this were 10 – even five – years ago, Brinkley’s product positioning might have been deemed a gamble. Yes, the line’s core raison d’être is anti-aging; vegan is only one chapter of the story she’s telling. But the fact that Brinkley will be able to riff about why eschewing animal ingredients and testing is important to her — on the massive platform that is HSN – speaks volumes about where the beauty industry is headed these days.

In short, consumers care today like they’ve never cared before. Not every consumer, of course. And not to the same degree in every category of product, which we’ll get to in a moment. But evidence that there’s a growing sector not just open to the idea of vegan goods (along with fair trade and sustainable, two other emergent categories), but actively seeking them out, is irrefutable.

All of which makes Joshua Katcher, a vocal proponent of animal rights and a vegan mogul-in-the-making, very happy. An expert, consultant and frequent lecturer on the topic of ethical fashion and personal care, Katcher markets luxe, sustainable men’s clothing and non-leather shoes under the Brave GentleMan moniker. And with the recent launch of a vegan “Beard & Body Brick” in three scents, he’s dipping a toe in grooming, too.

The growing herd of animal-free offering.

“There’s a huge rise in the offerings of products across the board that meet a specific set of criteria to be labeled ‘vegan,’” Katcher says. “We’re seeing huge rises in numbers within the cuisine, fashion and personal care realms, and more business owners are realizing what a huge financial advantage it is to aspire to meeting these criteria. Simply viewing the analytics of people Googling the word ‘vegan’ over the last several years is very eye-opening.”

The proof is in the dairy-free pudding; punch “vegan” into the search function of Sephora.com, and 145 products immediately pop-up, including several from brands one wouldn’t necessarily think of as vegan-leaning, such as Dr. Dennis Gross Skincare and Cover Fx. And there are more and more tiny vegan indies, from Gnarly Whale and Drunk Elephant to OLO Fragrance, cropping up every day.

While he agrees that vegan is gaining ground and is not just the fad du jour, Ron Robinson, cosmetic chemist and founder of Beautystat.com, also believes that plenty of beauty consumers will likely pick their battles.

“I think vegan will stick,” Robinson says. “As more consumers — from a full-blown health, wellness and nutritional perspective — are moving toward vegan, that will trickle into their uses of other consumer product categories, such as beauty. I see it as a lasting trend.”

The elephant in the room: product performance.

With one massive caveat, however: performance. When a product really needs to work, and not just look pretty on the eyes, cheeks or lips, vegan can become less of a priority. “It’s easier to formulate a good-performing vegan makeup product versus anti-aging skincare,” Robinson notes. “When you’re expecting it to deliver benefits against improving the skin or treating the hair, that’s when you’ll see less pressure and concern about whether a product is vegan. To go 100 percent vegan – or chemical-free by cutting out ingredients like parabens – a brand might be sacrificing performance.”

But it’s a sacrifice, and risk, that an ever-greater number of new brands are beginning to take. Case in point, the upcoming “BIY” (Blend It Yourself) beauty line by entrepreneur Tina Hedges, which will deploy vegan ingredients whenever possible. Dubbed LOLI – an acronym for Living Organic Loving Ingredients – it also seeks to be fair-trade, sustainable and “transparent” as to where it sources its raw materials.

This isn’t the first time at the vegan rodeo for Hedges; when she co-created the hair care range Jonathan Product with LA coif king Jonathan Antin way back in 2004, Hedges and her then-business partner were ahead of the curve.

“When we first pursued the vegan certification, many of our raw ingredient vendors and sub-contractors were puzzled,” says Hedges. “And a few were adamant that it was a ridiculous claim for beauty, that it was pertinent only to ingestibles or the food category.”

Hedges and company stuck to its guns, working with ingredient vendors to document that the products were not just cruelty-free (i.e., not tested on animals), but devoid of any dairy derivatives. Wheat, too, which means Jonathan Product was also gluten-free – a possible industry first. “Both wheat- and milk-derived proteins are often used for hair strengthening and repair,” says Hedges. “So we had to find new raws and develop our own proprietary actives.”

Why go to all that trouble? “It began as a general conversation with Jonathan around cruelty-free,” says Hedges. “But then we challenged our thinking, and we all felt the next frontier was to push that claim even further, to another level of ingredient purity.”

Once the frontier, now front and center at a cosmetics counter near you.

That’s a strange question, and the answer is even stranger: “yes,” at least figuratively speaking.

It all has to do with vendor allowances and the revenue bump they give retailers. These allowances are intended to incentivize retailers to better promote or better display a manufacturer’s product, and there’s generally a lot of money left over for retailers after that’s done.

For a long time, supermarket insiders have cloaked vendor allowances in secrecy, privately referring to them as the “drug” supermarkets just can’t kick. The metaphorical drugs caused supermarkets to become almost entirely dependent on them for profitability, despite the fact that they fostered grotesque retailer inefficiencies in the long run.

Now a day of reckoning may be at hand, because Tesco has blurted out the dark truth. Tesco, a huge UK supermarket chain, is being battered by newly disclosed accounting irregularities that were used to puff up financial reports by hundreds of millions of dollars.

Tesco stated: “[Irregularities] are principally due to the accelerated recognition of commercial income and delayed accrual of costs. Work is ongoing to establish whether this was due to error or an aggressive accounting policy.” Commercial income, by another name, means vendor allowances.

Overstating the Case

Tesco is the victim of its own overstated accounting, a far too common practice in the food industry.

How grave is Tesco’s problem? The chain has acknowledged that its profits over the past two years were overstated by $412 million, about half of which occurred in the first half of 2014 (with the balance over the preceding 18 months). Clearly, the problem accelerated at a fast clip.

In the wake of the scandal, roughly 10 top-level executives were shown the door, including Board Chairman; Richard Broadbent.

To get an insight on what these vendor allowances are all about and how they became fertile ground for cooking the books, let’s take a look in the rearview mirror.

Making Allowances

Vendor allowances are by no means unique to supermarkets. They flourish in various trade channels, from department stores to consumer electronics stores. But allowances are uniquely important to supermarkets because they operate on such thin profit margins. The revenue boosts they represent are essential to profitability. It’s a Faustian dilemma: Many supermarket chains would be completely unprofitable and out of business if it weren’t for vendor allowances.

So what are these allowances, and how did they come about?

They date to Nixon-era wage and price controls in the 70s which were designed to curb inflation. At the time, manufacturers saw compromising controls coming, so they sharply increased the price of goods. At the same time, they told retailers not to worry because they would receive allowances to offset the increases. The manufacturers cagily rationalized this as a means of building in increased list prices with the arrogant intent that retailers could be eventually weaned off the allowances. That was not to happen.

The first allowances were promotional, referred to as “street money,” which are fees paid to retailers by manufacturers to offset retailers’ cost of running cents-off advertisements. The result was the advent of the notorious “tombstone” newspaper supermarket ads that simply listed a product name and its price in a couple lines of type. Sometimes several dozen of these bare-bones ads would be heaped onto a page. They had all the personality and attraction of a phone book. Basically, retailers ran them so they could send manufacturers tear sheets, proving compliance with allowance requirements. The real intent was to perform on the cheap, banking the excess funds to meet their bottom line.

It wasn’t long before allowances proliferated. Some were offered by manufacturers, others demanded by retailers from manufacturers who wanted to do business with them.

In the long litany of allowances and similar practices, we find deals (short-term vendor sales), slotting fees (money charged by retailers to “slot” product into a warehouse or store), incentive rebates (fees paid as incentives to retailers to reach sales goals), off-invoice deductions (unilateral retailer markdowns of invoices), returns (rebates for goods deemed unsalable by retailers) and even more.

Unintended Consequences

Some of these allowances led to highly inefficient practices on the part of retailers chasing these funds. Deals, for instance, gave rise to forward buying, which is retailers’ practice of buying vast amounts of product on deal with the aim of bridging to the next deal. This caused retailers to build excessively huge warehouses to store the proceeds of forward buying. Huge capital costs resulted. Odder still, regional deals sparked a form of diverting: trucking product from one part of the country where it was on deal to another part where it wasn’t.

The most insidious type of allowance is incentive rebates, which brings us full circle to what happened at Tesco. These rebates are premised on the idea that if a retailer agrees to sell a certain amount of product in excess of what was previously sold, say, a year earlier, a substantial fee would be paid. Generally, manufacturers pay these fees in quarterly increments as sales goals are achieved.

Here’s the problem. Let’s say a retailer is experiencing sales and profit declines and is looking for a way to make the books look better. What could be better than to book the entire annual rebate in advance? At the same time, why not push costs forward to the next quarter? And that’s just what Tesco did.

Tesco is a company in deep financial trouble. In the first half of this year, Tesco’s operating profit declined by 41%, driven to those depths by increasing competition from discounters on its home turf, plus costs associated with retreating from several countries into which it imprudently expanded. As we have reported, Tesco withdrew from the US not long ago.

Failing and Flailing

In the US, there are two companies that fell victim to early booking of incentive rebates, the very same problem Tesco now faces.

One is grocery wholesaler Fleming Cos., which failed outright. Fleming veered into the realm of dubious legality by demanding “side letters” from vendors’ sales reps specifying that incentive rebates would be paid even if sales performance fell short. The problem was that the actual contracts demanded performance. When the practice was uncovered and halted by vendors, Fleming’s fictitious revenue prebooking led to quick collapse. Ahold of the Netherlands, which at one time owned many different supermarket chains along with a foodservice company in the US, nearly failed because of allowance prebooking. Ahold squeaked out survival by jettisoning foodservice and reducing US supermarket holdings to two major banners – Giant and Stop & Shop. Ahold’s former CEO and CFO went on trial in Holland because of the accounting scandal. Both received suspended prison terms, but paid sizable fines and vanished from the business.

All this raises the issue of what can be done about deals and the harm they cause. Like most counterproductive practices, there is incentive among all parties to leave them in place. In the US, about 8% of many retailers’ profit (that’s about all of it) can be attributed to vendor allowances. Moreover, retailers particularly skilled in wringing allowances from manufacturers have an advantage over less-skilled competitors. In a vicious circle, manufacturers like allowances because they are key to “trade loading,” that is, moving product out of their warehouses to retailers’, generating attractive sales numbers, which lead to big bonuses.

The Reformation

Increasingly, though, manufacturers are realizing that the practice of allowances must change. Right now, Procter & Gamble is divesting minor brands along with their less promising brands. Many of these brands were kept afloat by trade loading. Retailers, pushed by discount chains, also realize that selling product to customers at an unfair price offers no future. A shorthand way to judge whether a retailer is earnest about a customer-centric strategy is to see how their private label is doing. The proportion of private label sold by a retailer that’s also a “buyer” is low because private label offers no vendor-alliance opportunities. Conversely, a retailer that sells a lot of private label must be in the selling business. That situation comes about because a private label is owned by a retailer. Retailers can’t pay themselves allowances; allowances transfer funds from branded-goods manufacturers to retailers.

A good example of consumer-centric retailing can be found at Kroger, the largest and most successful supermarket chain in the US. It now generates 25.2% of all sales from private label. Its mid-tier Kroger store brand is the best-selling single brand of any type at the chain, and these numbers are the highest of any supermarket retailer in the US.

Since P&G is the nation’s largest consumer packaged goods manufacturer and Kroger its largest supermarket retailer, could rationality return and supermarkets get off drugs?

Maybe that will happen since the key to success for retailers of all types is simply to offer product consumers really want at a fair price. But legacy retailers that have been long dependent on manufacturer funds will have a tough row to hoe to get there.

John Burr Fairchild, who turned a family owned bread and butter garment center trade publication, Women’s Wear Daily, into a fashion powerhouse, passed away last week at 87 years of age.

John completely understood the business of publishing. His father, Lewis Fairchild, drummed circulation, advertising and administration into him. His father had no need to school John in journalism; he had spawned an editorial genius.

Rarely has a man’s talents and interests been so perfectly synchronized with John’s innate journalistic abilities, his love for fashion and those who practiced it, as well as his incredible fashion instincts, all married to pitch perfect taste. He was, without question, simply the best fashion editor there ever was in the time, of his time, and maybe for all time. No one even came close during his reign at Women’s Wear Daily and W. And no one has come close since. Legendary Vogue Editor, Diana Vreeland, walked in the same rarified atmosphere, but lacked all of those other skills that John possessed combined with the right vehicle to exploit them.

John’s, and therefore WWD’s/W’s power, came from the fact that he knew how clothes should be made, the right fabric choices, and the use of color in fashion– few designers had his mastery of blending colors. That’s why he loved Yves Saint Laurent who designed his own fabrics in virtually any style, could mix colors better than any designer, and cut clothes to perfection.

Designers feared John Fairchild because they knew he knew what a well-cut dress or suit should be; what colors worked together, and whether the end result was in the best taste of the season. Moreover, the designers knew that other designers, as well as retailers, knew that his words carried the weight of “as close to genius” as one could find in the fashion world. They wanted his blessing and feared he would judge them as coming up short.

I worked closely with John, more closely than anyone else from 1971 until 1997. I was editor of WWD and the first editor of W, as well as CEO of Fairchild Publications. I remember when Stuart Elliott of The New York Times was interviewing us and asked how we worked together. I said we had a “pilot/co-pilot relationship. John set the course, and sometimes he flew the plane and sometimes I did.” John then looked over at me and said, “That is so boring.” He looked at Stuart and said, “We are two mad monks stirring up a witches brew.” The reporter looked at us and didn’t know what to say. John was delighted with his quote and after the reporter left, said, ”Mine was much better than yours.” I said, “Yes it was, but I hope he uses mine.” In the end he left out both our quotes.

John was always witty and the smallest things about the fashion and the fashion world amused him to no end. It is his silly side that gets written about so often; his teasing of fashion celebrities with nicknames, his feuds with designers, and his “In and Out” lists about virtually anything, while all the serious stuff about him got overlooked.

He understood marketing, and in particular, how to sell a story. It drove him crazy when editors would come upon a potentially important story and would produce a short piece with no pop. He would say the poor boy or girl wouldn’t know a story if it hit him or her in the face. Or more often he would say, “The poor thing just doesn’t have any taste.” That was about the worst thing he could say about anyone. In his world, the best taste was reserved for the highest order of beings. And in John’s opinion, many well-known celebrities, and that included many well-known designers, lacked that highest of all virtues.

Don’t forget. John Fairchild did know.

In the horror story of the declining fortunes of the American shopping center, the central character is the “Ghost Mall” – abandoned, forlorn, and lifeless — but looming, casting a post-apocalyptic pall over the American Dream. The website, DeadMalls.com, provides ample evidence that ghost malls are real and that they appear to be a growing insidious blight across America. The eerie photos show boarded-up entrances, broken glass, empty storefronts and hulking monolithic edifices surrounded by desolate unkempt parking lots. Hollywood even used a ghost mall to symbolize menace and hopelessness in last year’s psychological thriller “Gone Girl.”

Frightened yet? Well don’t be. In a country with an astounding 23 square feet of shopping mall space for every man, woman and child – representing almost 70% of the world’s supply — it should come as no surprise that some obsolescence and creative destruction is inevitable…even desirable.

Over the next 10 years it is estimated that between 10% and 15% of existing malls in the U.S. will be redeveloped or closed. On the surface this seems dire, but it is an obsolescence rate of only around 1% per year. Also consider that an estimated 760 new malls will open in the next three years through 2016, adding almost 2% to America’s abundant mall inventory. Despite the hand wringing, the American mall is not experiencing a seismic shift, but instead by a process of natural selection, is going through a healthy evolution to a state better adapted to a changing world. Some might even say, “not fast enough.”

Many malls will not be able to adapt to the numerous external demands. Those destined to join the netherworld of ghost malls will succumb to some combination of the effects of demographic shifts, lifestyle preference changes, competition from other distribution channels and an increasing demand for higher quality retail environments. Broad economic changes – like the diverging trends in stratified income growth – threaten the middle class, and therefore the malls that cater to this crucial group. Some malls are also dying from the inside out burdened with lackluster tenants like Sears and JC Penney that struggle to remain relevant to consumers.

A mall is ultimately only as good as its tenants. The retailers that create a desirable offering will continue to be the engine of success for American malls. The design of shopping centers however also has an important role to play, and many ghost malls with their low ceilings, inadequate natural light and monolithic exteriors offer lessons worth learning from. The design of most of these ghost malls can best be described as functional and bland. Developed in an era of rapid expansion, it was not considered a competitive advantage to enhance the customer experience through mall design – and it shows.

As the landscape became saturated and the supply of shopping centers began to exceed demand, the quality of the retail environment, and therefore “Design,” finally became a competitive advantage. This has provided a great benefit to consumers who are now wooed with a variety of retail experiences specifically designed to delight and charm them. Two distinct approaches to shopping center design have emerged, and in many ways, they occupy opposite ends of a spectrum.

On one end of the spectrum is Los Angeles developer Rick Caruso’s “Back to the Future” developments like The Grove and The Americana at Brand. Inspired by the traditional town centers that rampant suburban mall development helped destroy half a century ago, Caruso’s community shopping centers attract tens of millions of visitors each year. With their town greens, ample landscaping and human-scaled traditional architecture, they offer a compelling vision that is familiar, comfortable and reassuring. If these retail centers were only a little less pastiche and had a little more design integrity, they would be truly timeless. One of the best hopes for immortality is design integrity; it offers one of the authentic forms of immunity against becoming a ghost.

At the other end of the spectrum is the “Brave New World” of visually arresting modern architectural extravaganzas epitomized by architect Daniel Libeskind’s CityCenter in Las Vegas and Santiago Calatrava’s spectacular transit hub and shopping center at New York’s World Trade Center. Instead of being “familiar, comfortable and reassuring,” these avant-garde architectural fantasies are original, exciting, and brazen. Their larger-than-life scale and dynamic geometries can be unsettling as well as uplifting, even inspirational.

At both ends of the spectrum we are moved and made more alive by the power of design.

However, the vast majority of malls, living and ghosts, have shops uniformly stacked shoulder-to-shoulder on either side of a bland central corridor. They follow this format, not because they are inherently appealing to shoppers or retailers, but because they are efficient for developers to build, operate and lease.

Shopping center behemoth, Simon Property’s hostile bid for Macerich, is also driven by a desire to realize operating efficiencies, but moreover, to increase its negotiating power with retailers. If the $16B bid is successful, it will further consolidate the already heavily consolidated shopping center industry in America. This may not bode well for consumers or retailers. High quality design, and the myriad other consumer benefits born through innovation and creative destruction, depend on a fiery crucible of competition. Simon’s bid, if successful, will surely turn down the heat

Remember the old adage that “retail follows the rooftops”?

If you do, then you probably have fond memories of the Eisenhower administration, the post World War II suburban building boom when Sears Roebuck and J.C. Penney ruled the retail roost, and Sam Walton’s 5&10 variety store in Bentonville, Ark.

So much for nostalgia!

For 2015 and beyond, following those rooftops — the population centers retailers crave to be near — will get trickier. Fewer of them are being built, and they are no longer where they once were. Concurrently, premium locations are getting more expensive and some lenders, unsure of what new retail formats will look like, are keeping a lot of cash on the sidelines until they see another shakeout.

Maybe it’s time to adopt a new mantra. Namely, that retail follows the population and the population follows jobs and new technology. With that as a guide, we should be looking at two major factors that are already having an enormous impact on store development:

• Migration of younger consumers (Millennials) to urban areas in top tier as well as secondary and tertiary cities.
• Channel migration in which omnichannel and e-commerce initiatives, including mobile, are cannibalizing in-store sales and more than making up for any reductions in physical square footage.

Retail Schizophrenia

These trends are major challenges for retailers whose financial models are bound by the old idea that bigger is better. As such, we are seeing a sort of retail schizophrenia. One voice says expand or die. Another says expand and die. The question, to borrow a line from the movies, is “if you build it, they will come?”

A bewildering blitzkrieg of new technologies has put a retail store on every digital device and radically changed shopping habits. Has brick-and-mortar retailing as we knew become obsolete — or far less important — for a new “storeless” generation of shoppers?

Even developers, always anxious to get new projects out of the ground, are only cautiously optimistic. In their hearts, they admit that the old if-you-build-it-they-will-come attitude doesn’t work the way it did in decades past — especially when it comes to large anchor tenants.

Everyone is coming to the difficult realization that unbridled building of more retail space is economically unsustainable and fiscally irresponsible in an already overstored industry.

Reduced Productivity

This was underscored by Accenture, whose analysis of 29 top U.S. retailers revealed that from 2005 to 2010, total square footage increased 38 percent while store count increased 21 percent. Unfortunately, sales per square foot during that period declined 5 percent. Less productive stores reported a 25 percendrop in return on invested capital. The majority of traditional retailers are overstored. Even with store closings over the past four years, there’s no reason to believe this trend hasn’t continued.

The result is an industry that must change the way retail real estate is viewed, obtained and developed. No one is suggesting a slash and burn strategy when it comes to store counts, but a comprehensive analysis of store portfolios. This could also be an opportunity to renegotiate leases with landlords who no longer have the upper hand.

Back to the Future

This transition is also taking the industry back to its roots — smaller footprints that cost less to build and stock and, in the process, create a more profitable store network. This speaks to the redevelopment of the inner core or the “18-hour city” — areas that are becoming more vibrant at night and during the day due to the influx of younger consumers who are patronizing local stores as well as shopping on their phones and laptops.

Even Walmart, the supercenter’s most ardent cheerleader, has concluded that building simply for the sake of getting bigger is a recipe for disaster. Consequently, the company’s investments and experimentation with smaller formats like Walmart Express, On Campus and Neighborhood Market, is a clear indication that the 200,000-250,000 square foot behemoth is no longer the dominant and fear-inducing format it once was.

The same is true of retailers like Target, with TargetExpress and CityTarget, Best Buy and others that are expanding into smaller formats that are a better fit for revitalized inner-city locations.

These and other formats are also geared to quick fill-in grocery trips enabling them to compete more effectively against dollar stores, drug stores and small formats like Aldi and Trader Joe’s — both of which are expanding into some of Walmart’s markets. Of course, small footprint stores, in and of themselves, are no guarantee of success as Tesco’s Fresh & Easy stores discovered after burning through several billion in capital.

Managing Change

Aside from the fact that the real estate needed for supercenters is getting more expensive and harder to find, consumers want more manageable alternatives. They no longer have the time or patience to walk miles of aisles when smaller stores and specialty shops have everything they need. This doesn’t point to the demise of the one-stop shopping concept. Rather, the industry has to adapt and create a compelling shopping experience in less space or in mixed-use developments that are going up across the country.

Meanwhile, we are seeing the remodeling and redevelopment of regional malls into family entertainment centers with more innovative restaurants to augment or replace overcrowded fast food courts, cinemas and more fun things to do in architecturally pleasing environments. An example is the Mall of America in Bloomington, Minn., which has its own aquarium on site. Here I have to steal a quote from Starbucks’ CEO Howard Schultz, who said: “You walk into a retail store, and if there’s a sense of entertainment, excitement and electricity — you want to be there.”

On another front, neighborhood shopping centers, usually anchored by supermarkets, are attracting attention as one of the main drivers of real estate demand. In some cases, they are replacing regional malls as the center of center of consumer activity. In effect, they are becoming the lifeblood of many communities and increasingly desirable locations for every segment of retailing.

One question that’s emerged about local shopping centers as well as malls is whether cheap leases signed during the recession and now coming to an end will throw a lot of excess real estate on the market. We could see more empty spaces dumped by retailers that are unwilling to renew at exorbitantly higher rents. But many insiders feel there is enough demand to absorb the space.

Another major trend that is likely to have a significant impact on physical space is hybrid retailing, or so-called “click and collect” operations, that enable customers to buy online and pick up purchases in store rather than waiting for home delivery by companies like Amazon or other providers. The customer convenience angle is undeniable. But will it turn brick-and-mortar stores into nothing more than fulfillment centers that exhibit little more creativity than a warehouse? Overall, the competition for good, productive space is going to intensify this year in many locales across the United States. So let me end with this quote from the comedian Milton Berle: “If opportunity doesn’t knock, build a door.”

Joni Mitchell wrote the line “They paved Paradise and put up a parking lot.” How much of our lives are defined by parking. Call it a tangible ramification of the invention of the wheel or perhaps an odd cultural addiction to smooth hard surfaces.  For global retail it is the apron, in whatever form it takes. Visit a new urban shopping mall in Tokyo: the model is a conceptual Ferris wheel, an elevated spinning parking lot where each car has its own compartment. Drive your car into the cube, it gets lifted and stored away in the sky.  In Seoul, many shopping malls have cameras focused on each space and a software package that reads license plate numbers; through an interactive screen in an elevator bank or a phone app, you are guided you through a dimly-lit maze to your vehicle. For all the innovation across the world, parking is still mostly flat asphalt and concrete, accessorized with a little paint.

Parking lots are the historic starting and ending point for retail. They are often barren and windswept, especially on a winter weekday inside a garage at Mall of America. They are sometimes scary; who ever loved a parking lot? No one ambles; everyone rushes to unlock their cars. More accidents happen in parking lots than on the highway. They are laid out by engineering teams trying to fit in as many spaces as they can. Outside of Seoul and Tokyo, parking lots have not conceptually changed since the invention of automobiles. Until now.

General Shopping is a Brazilian mall developer/operator and, full disclosure, I serve on its advisory board. It currently has some 23 locations across its portfolio. Some urban locations in Rio and Sao Paulo, an old Olivetti Typewriter Factory repositioned as a mall near Guarulhos Airport, and a series of outlets called Outlet Premium. It is a family-owned business. The CEO, CMO, COO and CFO were high school classmates now in their late 30s and early 40s. They can complete each others’ sentences. In the rough and tumble world of emerging market shopping, they have managed to tiptoe through the landmines of politics, expensive financing and larger competitors.

The first Outlet Mall location opened some 40 miles outside of Sao Paulo. It is set into the side of a hill, with industrial buildings, an open-air food court and exterior parking. The plan was to replace parking areas as needed with new buildings. Almost 10 years old, it has been a major hit in the mall marketplace. A water park and hotel were quickly developed on an adjacent piece of property, and a destination was created.

The second and third Outlet Premiums have been built outside Brasilia and Salvador. In a troubled Brazilian economic climate, both malls are flourishing. About 20 months ago, we conducted our first comprehensive review of the two new properties. What was working, what wasn’t, what General Shopping could be doing better and where the opportunities were. Not surprisingly, parking lots were our starting point.

One of the things we noticed about the region was the high number of motorcycle cruisers; Yamahas, Harleys, Hondas — all the big ones. Brazil is known for its crazy Cycle Boys, the young men that make their living making deliveries and die daily zipping in and out of heavy traffic. These Boys drive medium-sized bikes that lend themselves to high-risk, high adrenaline zipping. What we saw in our parking lots were not these smaller bikes, but hogs. Based on our informal survey, wealthy middle-aged Brazilian males like big cruisers, not unlike their American counterparts. Driving to the Outlet Premium malls on a big motorcycle has become very popular. Park the wife or girlfriend on the back of the bike and roar off on a forty-mile excursion out of town to the mall. It’s a perfect weekend activity, and a happy trade-off, for everyone.

What we also noticed were all the gawkers. High-end bikes just attract attention. Our thought was, why not move motorcycle parking into the body of the Outlet? In this case, it was in the Brasilia location, sited right next to a popular restaurant.

One the nice things about working for family companies is that a good idea doesn’t have to go to a committee. It took a month to make the improvements: new concrete floors, lighting, and training for the parking lot guards on how to direct traffic and manage the men.

The results were awesome. The number of bikes on display increased with each passing weekend. The interior lot was filled with people, often families just fawning over the bikes. The adjacent restaurant reported a serious increase in sales. Visiting the informal bike display became one of the leading reasons families, especially with young boys, liked coming to the mall. And a year later, we started getting calls from motorcycle dealers asking if we could build them showrooms on site. They are a mall tenant we never imaged having, and couldn’t be happier to have. One of the brands even asked if they could have their own lot.

General Shopping is rethinking parking altogether. New malls will have power and water built in to parts of their lots. We are thinking food trucks, crafts fairs, car shows; we now look at our asphalt not as a cost, but an opportunity for place making. Wouldn’t you like to see a lot of cool bikes all in one place? Or even better, go to a weekend Maker Faire? The transformation of parking lots has also re-energized the parking lot managers, because they, too, realize that if their lots go from a cost to a profit center, they might make more. A LOT more. No pun intended!