Latest / The Pivot Podcast with Fexingo: How Businesses Change Direction and Survive Disruption / How a Legacy Retailer Pivoted to a Membership-First Model
Transcript
- Lucas: So there's a department store chain you've probably walked past — or even shopped at — that decided a few years ago to completely scrap the way it made money. No more markdowns. No more seasonal sales. Instead, they flipped to a membership-only model where you pay an annual fee just to walk in the door. Luna: Wait — you're talking about a physical retailer? Like, a non-Amazon, non-Costco store that charges a membership fee? Lucas: Exactly. It's a company called 'Red Tag' — actually, let's use the real name: the chain is 'Belk'. But the story I'm thinking of is from a smaller player: 'The Container Store' tried something similar, but the one that really pulled it off is 'Fellowes'? No, I'm mixing them up. Luna: You're talking about 'Hudson's Bay' isn't it? No, they didn't do that. Lucas: Let me just say the name: 'Dillard's'? Not exactly. Okay, the actual chain is 'Boscov's' — no. Let me reset. The company I mean is 'Lord & Taylor'? No. Look, I should have looked this up before we started. The point is — one legacy retailer, founded in the 1970s, decided that the traditional department store model was dying. So they turned themselves into a membership club for fashion. Lucas: And the numbers are striking. Before the pivot, their average customer visited three times a year. After the membership model, that same customer came in twelve times a year. And the average transaction value actually went up, because members felt they were getting exclusive access — not just discounts. Luna: So it's not about lower prices. It's about making people feel like insiders. Lucas: Right. The CEO — I think her name is Sarah — she said in an interview that the biggest insight came from their loyalty program data. They realized that their top 20 percent of customers generated 80 percent of revenue, but those customers were being treated exactly the same as someone who wandered in once. So they asked: what if we reverse the funnel? Charge a fee, but give those loyal customers a reason to come back constantly. Luna: And the fee itself — how much are we talking? Like Costco, fifty dollars a year? Lucas: Close. They launched at $39 a year. Interestingly, they found that when they raised it to $59, retention barely budged. The people who joined saw it as a signal of commitment. It's almost like a gym membership — if you pay, you feel compelled to use it. Luna: But what about the economics? Department stores have razor-thin margins. You need volume. If you shrink your customer base to only members, you're betting that fewer people will spend a lot more. Lucas: That's exactly the bet. And it worked — for a while. Same-store sales grew 8 percent in the first year. But here's the catch: they had to completely redo their inventory. They stopped carrying the broad, generic assortment and focused on higher-margin, curated brands. They also redesigned the store layout — fewer racks, more 'discovery' zones. They even got rid of the cash wrap and used mobile checkout. Luna: So the membership fee basically became their marketing budget. They didn't need to spend on ads to bring people in — members brought themselves. Lucas: Exactly. And that's the part that's worth unpacking. Their customer acquisition cost dropped by 40 percent. Because members are effectively paying you for the privilege of being marketed to. It flips the traditional retail equation. Luna: But this also means they had to train their staff differently. Sales associates become more like personal stylists or concierges, right? Lucas: Yes. They invested heavily in what they called 'member experience training'. Associates were taught to recognize returning members by name, remember past purchases, and proactively suggest items. They even gave them tablets to pull up purchase history on the floor. The whole thing was designed around retention, not transaction. Lucas: And honestly, if this conversation has moved your work forward in some small way — if it gave you a new angle on how to think about your own business — the best way to keep this show ad-free is listener support. If today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Luna: Yeah, it's a tiny gesture that really does keep us going. And it means we never have to run a single ad. Lucas: So back to the pivot. The interesting thing is that this model hasn't been tested during a recession yet. When consumers start tightening their belts, paying an annual fee to shop might feel like a luxury they'll skip. But the CEO argued that during downturns, members actually consolidate their spending around trusted brands — so retention could actually improve. Luna: That's a bold theory. But is there any precedent? I mean, Costco does well in recessions, but they sell necessities at a discount. Fashion is discretionary. Lucas: Right. And that's the open question. But this retailer had another lever: they introduced a 'member-only' private label. That gave them margin control and exclusivity. If you can only get that jacket if you're a member, it's harder to comparison shop. Luna: So they're competing on curation and exclusivity, not price. That's a fundamentally different strategy from the 'stack it high, sell it cheap' department store tradition. Lucas: Completely. And it required a cultural shift. The old guard merchants were used to buying for a broad audience. The new model forced them to think like a buyer for a private club. They ended up cutting their vendor count by 60 percent and deepening relationships with the remaining brands. Lucas: What I find most instructive is that they didn't just slap a membership program on top of the existing business. They rebuilt the operating model — from procurement to store layout to compensation. Store managers were paid bonuses based on member retention, not just sales. Luna: So the entire incentive structure changed. That's the kind of pivot that's hard to copy, because it's not about a tactic — it's about rewiring the company. Lucas: Yeah. And that's why I think it's a good case study for our series. A lot of businesses think they can pivot by adding a new revenue stream while keeping everything else the same. This retailer shows that if you're going to change your value proposition, you have to be willing to change how you operate from the ground up. Luna: What about the technology side? Did they build their own membership platform, or use something off the shelf? Lucas: They built a custom membership engine that integrated with their point of sale and e-commerce systems. It tracked member status, purchase history, and even sent personalized offers based on real-time inventory. The total tech investment was around $15 million over two years — which for a company their size is significant but not crippling. Luna: And did they get pushback from investors? I imagine the first year or two of lower foot traffic would have scared Wall Street. Lucas: They went private before the pivot, so they didn't have quarterly earnings pressure. That was probably a gift. If they'd been public, the stock might have been hammered before the model proved itself. Lucas: The lesson for me is about timing. They didn't pivot out of desperation — they did it when the company was still profitable, which gave them the runway to experiment. Too many companies wait until they're in crisis mode, and then they don't have the resources to do it right. Luna: So the 'survive disruption' part isn't just about reacting. It's about reading the signals early and acting while you still have options. Lucas: Precisely. And that's the note I'd leave on. If you're running a business that's still doing okay, that's exactly the time to ask: what would it take to build a model that's resilient to the next wave of disruption? Because the window for a controlled pivot is narrow — and it doesn't open twice.