Issue #72: Is Gen Z Brand Loyal?

Know any early-stage startup retailers? Next year, I am going to be doing an interview series with early-stage startup retailers and would love any recommendations or introductions!

Is Gen Z Brand Loyal?

A couple of weeks ago, in Issue #70, I wrote about how brand affinities are developed. From that piece, I had a couple of takeaways:

• Emotion > Thinking in the initial purchase

• Personalization is key to building lasting relationships since you can integrate into the consumer’s lifestyle, and the best personalization comes from friends and family

• New consumers resonate with a community (social media and/or specific platforms) built over time to influence the initial purchase and build subsequent lifetime value

Still, as I have been reflecting back on that piece, and continuing to think about brand loyalty, I realized I didn’t discuss one key element: age. In particular, the question of whether Gen Z is loyal to brands. I don’t know the answer, so I turned to Google to research it, and funnily enough, let’s look at the top three results:

• April 2023 - Why Gen Z customers won't be tied down to one brand, McKinsey & Co

  • Takeaway: Gen Z can’t be tied down; they are likely to switch between brands even if they have a favorite

• August 2024 - Turns out Gen Z is pretty loyal to brands, Retail Brew

  • Takeaway: 61% of Gen Z shoppers identify as “forever customers” for a brand compared to 57% of millennials and 43% of boomers

• October 2025 - The death of brand loyalty? Gen Z drives a loyalty ‘recession’, SAP

  • Takeaway: Gen Z is more loyal to trends rather than brands, the loyalty lies with the specific product that went viral

These headlines are just a snapshot of the many out there, but the consensus is clear, there is no consensus! Keep scrolling, and you have contradiction after contradiction. However, in all the pieces, one thing stood out to me. No one is examining the loyalty programs themselves - are they getting better or worse?

In my opinion, from surveying the offerings in the market, generally, the value for a lot of programs has diminished. I understand from the business’s POV that these are a big cost, and many of your customers are already loyal. However, that is why you see Gen Z struggling the most with brand affinity compared to other generations. They do not have the brand affinity that others have built up, so the diminishing value of the programs impacts them the most. For a boomer who has been with a product for a long time, they are less likely to switch due to diminishing loyalty program as they have all that built up affinity. In the market, many brands are diminishing their programs. Here are some examples of programs that have changed recently:

• Chase Sapphire Reserve increases annual fees and changes how you earn points

• Marriott Bonvoy no longer gives loyalty points for bookings through a third party

• Delta Airlines does not give miles for flying basic economy

• Starbucks reduces reward for bringing in your own cup

Overall, I think the decline in brand loyalty for Gen Z is multi-faceted, albeit too early to definitely tell what is going on. Does it surprise me that the generation with instantaneous stimulation and commerce is a little less loyal? No. However, that fails to take into account that generations respond to different messages. Maybe these programs would have further success if they changed up the system to be more Gen Z friendly. Finally, the value of many of these programs has been diluted, which also hurts the overall brand loyalty. Look at the likes of Trader Joe’s and Costco, which have remained steadfast in their brand loyalty programs, or lack of them, and see their success with Gen Z.

What are your thoughts? Would love to hear from some readers!

Leap x Shopify x Simon Property Group

As readers of this newsletter, you know that for many growing brands, having a physical retail location can be a boon for business, albeit a challenging one to set up. For a while now, Leap has been working as a Retail as a Service Startup to provide emerging brands with an all-in-one solution to get into retail. Some of the brands they have worked with are Paper Planes, Collars & Co, ThirdLove, True Classic, and more. Then, in 2022, Simon Property Group, one of the largest owners of retail malls in the United States, announced a partnership with Leap to help fill in some of the gaps in their real estate. This partnership enabled Bombas to launch retail locations across the country for this holiday season. Now, as they try to push further into retail with the launch of its POS system, Shopify is getting involved with the collaboration as it tries to provide a full-service retail solution. Leap now integrates with Shopify. The combination of Leap (ops), Simon (real estate), and Shopify (technology/POS) will allow a true retail in a box solution. It will be exciting to follow along and see what other brands beyond Bombas leverage this solution.

Kroger Exits Florida and Shuts Down Some eComm Operations

Kroger does not have any physical walk-in retail presence in Florida, but has partnered with British grocery technology startup Ocado to launch three semi-automated eCommerce fulfillment centers across the country, including one in Florida. These facilities are located in Pleasant Prairie, Wisconsin, Frederick, Maryland, and Groveland, Florida. As of January, all three locations will be closed as Kroger tries to boost the profitability of its current unprofitable eCommerce business. In the other states, where Kroger has additional stores, I am assuming the other stores will absorb the volume. But in Florida, it seems like the three spoke facility locations in Florida where people picked up the orders will be closed. It is really challenging to do eCommerce profitably overall, especially when you have to dedicate so much capex to it. We are yet to see a fully automated, massive eCommerce operation deliver orders profitably. I am sure we will get there eventually, but you either need no robotics or a smaller square footage, otherwise, the profitability comes into question.

How Does Clothing Distribution Work?

This week, I was chatting with someone when the topic of distributors came up. In the grocery and retail spaces, it is pretty clear who is doing that. You have the Syco’s, the KeHe’s, and UNFIs of the world, among others (check out Issue #69 for a deep dive into restaurant distribution). However, in the clothing world, like Nordstrom, for instance, it isn’t really clear who distributes. So, I decided to look into how it works, and it turns out, there is no distributor. Given that these are typically very light, non-expiry goods, the need for a distributor isn’t needed. Instead, brands typically sell directly to the department store and use a 3PL or freight company to get the product to the department store according to their guidelines. Usually, these department stores have their own distribution centers, so the brands ship the goods there, and the department stores self-distribute internally.

Target Tries To Turn Around Another Bad Quarter

With Q3 earnings being released, unfortunately for Target, it was another struggling quarter. Nest sales dropped 1.5% YoY, net margin declined 19% YoY, and same-store sales dropped 2.7% YoY. All around tough results as it tries to turn around a struggling business. Here is a summary of some of the changes:

• Invest an additional $1B into the business on top of the existing $4B it was planning on spending

• Using funds to add new stores, remodel existing stores, enhance the store experience, boost tech, and utilize AI

• Digital fulfillment will shift to be allocated to stores with lower foot traffic, so high foot traffic stores can focus on maximizing the in-store experience and serving customers (this could be huge!!!!)

• Shift how the floor is laid out in the store to be better merchandised

• Focus on an overhaul in the Home category in particular

• Utilize AI to help develop merchandise, develop consumer audiences, and make multi-item purchases via ChatGPT

• Inventory allocation between digital and in-store will be shifted

• Improving forecasting, orders, and inventory levels to keep top items in stock

Overall, it will be interesting to see how this goes. I am most bullish on the inventory stocking and eCommerce fulfillment, as the biggest issues I have seen with Target is a poor in-store experience from not having enough people to help you and not having merchandise in stock. Already, the pilots have seen results. The new fulfillment strategy was piloted successfully in Chicago. On the inventory front, they have been focusing on keeping the top 5,000 items in stock. These changes helped improve on-shelf availability by 150 basis points, on items that represent 30% of total unit sales.

Additional Links:

1. Haven Hot Chicken announces deal to launch 25 new franchise locations (read more here)

2. Whole Foods announces deeper partnership with food recovery app TooGoodTooGo, with more product categories now featured (read more here)

3. Sweetgreen launches 106g protein bowl (read more here)

4. Whole Foods Daily shop will be opening in Hoboken and Brooklyn in December (read more here)

5. Gap brand comeback leads to stronger Q3 performance (read more here)

6. QVC launches popup in NYC (read more here)

7. Bath & Body Works launches its products on Amazon

8. Pink Chicken, the children’s clothing store, announces expansion (read more here)

9. Amazon blocks ChatGPT from accessing its website and scraping it (read more here)

10. Kroger launches AI-powered supplier insights (read more here)

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