Is the retail sky falling?

Discussion
May 18, 2016

Reading some of the headlines and listening to some of the pundits lately, you couldn’t be blamed if you concluded that all is doom and gloom in retail. But is it really?

There’s no doubt that a number of retailers including Gap, Kohl’s, Macy’s and Nordstrom have posted disappointing, even dismal, earnings in recent weeks. Calls have come through for department store and specialty chains, particularly those in malls, to drastically reduce store counts.

Others, such as Aeropostale, have recently filed for bankruptcy. Sports Authority was another to go that route and the chain’s management made the decision to liquidate rather than reorganize as originally intended.

If you’re not depressed yet, that’s good because while there is no doubt that American consumers remain cautious when it comes to spending their hard earned dollars, recent sales figures suggest there is cause for optimism.

Last week, the Commerce Department reported a 1.3 percent gain in retail sales for April. While subject to change, it’s worth noting that the monthly jump was the highest achieved in 13 months and included gains in autos (3.2 percent); gas (2.2 percent); food and beverage (0.9 percent); furniture (0.7 percent); clothing (one percent); health and personal care (0.9 percent); and online (2.1 percent).

A number of companies, including Amazon, Home Depot and TJX, have posted strong, better than expected, sales and earnings figures.

More good news came via the latest government figures on housing starts and industrial production, with April proving to be a strong month for both. Economists, according to reports, are looking for the nation’s GDP to rebound this quarter.

DISCUSSION QUESTIONS: Are you bullish or bearish on the current state of the broad retailing industry? What factors – economic, social or otherwise – do you expect to have the greatest impact on retail results over the balance of 2016?

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23 Comments on "Is the retail sky falling?"


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Chris Petersen, PhD.
Guest

Healthy retailing requires healthy consumers. To be bullish on retailing requires being bullish on a growing economy, with median family income growing. I haven’t seen any of those stats yet. The biggest factor in retail will be to get the presidential election behind us, whoever wins. Economies and retail don’t thrive in a climate of complete uncertainty.

Max Goldberg
Guest

I’m in the middle. How’s that for taking a stand? I think that consumers are still cautious, a result of the Great Recession, with many not feeling financially comfortable enough to spend and incur debt at pre-2008 levels. The Great Recession also taught consumers that they may not need to purchase that extra item — they’ve learned that living with a bit less is OK. Caution has become the new normal, a state that will not change until there is real wage growth. We can’t expect the middle class to spend when that group is shrinking and the wage gap remains so large.

Bob Phibbs
BrainTrust

As I wrote in my post Millennials, He Wrote: How Retailers Are Paying The Price For Ignoring Baby Boomer Customers, I think the trend of expecting higher discounts to attract younger shoppers is wrong. Until someone owns the customer experience and sells their merchandise, many retailers are mere warehouses for products.

And unless you train your employees how to sell, they’ll sell like they’re at home in their pajamas

Kevin Graff
BrainTrust

Facts are facts. And the most overlooked fact is that while online sales are growing, the VAST majority of sales (90 percent?) are still done in stores and the bottom isn’t about to fall out of that number anytime soon.

What I think you’re seeing is that “middling,” run-of-the-mill retailers are in danger. Consumers are more knowledgeable and demanding. Only those brick-and-mortar retailers who step up and provide a better in-store experience will win. The good news is that lots are.

The media loves to play the negative angle. The best thing that could happen for retail is for the media to go away!

Al McClain
Staff

The sky is falling, in a lot of little and not so little ways. Wages are stagnant and the middle class just doesn’t have a lot of extra spending money. And, Amazon is killing everybody, even though they are having a real tough time making money. But, I remember when Walmart got into the supermarket business and many thought it would be the end of traditional supermarkets. It wasn’t, and online won’t be the end of traditional retail. The great operators will create new, fresh reasons for shoppers to shop, and continually improve their execution on omnichannel. The others will flounder, close more stores, and some will go out of business altogether. There is always hope, though, as even Sears has come up with a decent idea – appliance stores.

Cathy Hotka
BrainTrust

I just attended the Shoptalk conference, where the main theme running through the many sessions was the sharp adjustment in customer expectations. One CIO I talked with at the meeting complained that every retail CIO should have been there to see their future competition displayed for them.

Customers will naturally turn to companies that appeal to them and satisfy their requests. Change is in the air and everyone needs to get on board.

Mark Heckman
BrainTrust
Not to be overly dramatic about this topic, but I do believe there is something radically different about 2016 when it comes to the health and vitality of many traditional brick-and-mortar retailers. The perfect storm of a sluggish economy, consumer uncertainty, an upcoming election, new shopping alternatives and changing shopper expectations serves as the catalyst for store closings and poor results. Unfortunately, with the exception of the presidential election in November, I do not see any of these conditions going away in the near term, meaning those retailers that have not embraced a cogent omnichannel strategy and have not begun to truly leverage their shopper data for the customer’s benefit, will continue to shutter stores and file for financial protection. In an over-stored retail marketplace with little or no population growth, winning is all about filling a need better than the competition and doing so in a way that satisfies the shopper’s changing expectations of service, competitive prices and relevant communications through the shopper’s preferred channel. Those retailers who best understand the ever-changing shopper will… Read more »
Peter Charness
BrainTrust

I don’t think the sky is falling, it’s just changing colors. The customer is forcing a major change in what they want and how they interact with the retailer, forcing a major change to the retail business model. The fundamentals are still the same; deliver a compelling and differentiated assortment to the shopper. The how and where is a lot more complicated. Retailers that can find/build product that customers want and sell and deliver it how customers want to buy and collect it will win.

The “macro” while not wonderful in terms of the economics of the middle class is not great for sure, but on the other hand with lower gas prices, fuller employment it’s better than it was a year ago.

Mohamed Amer
BrainTrust
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
5 years 2 months ago

I am guardedly optimistic on the immediate state and unabashedly bullish on the future state of the retailing industry.

Whenever an industry (or an entire economy) undergoes deep transformation as we are today, there will be many bumps and bruises along the road and some glaring U-turns. Take Target’s Q1 results. They were basically inline but the view for Q2 was weak and the stock is getting pummeled. Yet the company is sound financially with a strong and loyal customer base.

We need to separate the monthly and quarterly knee-jerk reactions from the long view and what I see is an industry in transition with new sets of competitors infusing fresh ideas and value and stalwarts that are transforming at various speeds. The market will assuredly operate to reward those that are directionally in sync with the consumer and can communicate and deliver value at each and every interaction they have with their customers.

Yup, I’m bullish on retailing!

Kai Clarke
BrainTrust

Retailing is an adapt-or-perish business model. Since it is very dependent on and reactive to consumer spending, trends and dynamic ways to attract business are a constant focus. This presents a dilemma for retailers as they seek to give their customer what they want while communicating and appealing to customers through the latest technologies and with the newest products.

Herb Sorensen
BrainTrust

“‘Tis an ill wind, that blows no good!” However, from a shopper’s point of view, things are really looking up, with better and better access to every little thing, and easier and easier access to even the big things (size OR frequency!) However, for the past few years there has been a strong wind disrupting the retail world — online sales. And brick-and-mortar retailers are finding that disruptive, even if they “add it on” to what they are already doing.

Brick-and-mortar retailers just can’t seem to grasp that the fundamentals of brick-and-mortar retailing are changing — it is NOT just about layering on an online store over their vastly inefficient brick-and-mortar operation. What is required is the new “Webby Store,” that even seems to elude Amazon!

I have long said that as long as people live in brick-and-mortar houses, they will be shopping in brick-and-mortar stores!

Lee Kent
Guest

It’s an election year folks and the candidates are far from stellar. Methinks the public is nervous! And that’s my 2 cents.

Chuck Palmer
BrainTrust
We are at an inflection point. We are in flux. The social, political and economic forces that bare down on each of us (and in aggregate — millennials, boomers, etc.) are resulting in fragmentation like we’ve never seen before. This is exposing attitudes and behaviors that can seem puzzling. I expect there is nothing predictable or normal about the new normal. Is the sky falling in on retail? No. On stores? Perhaps. I agree that the mediocre are getting squeezed out. When Marshall Field’s was absorbed into the Macy’s collective, people were sad. Will anyone miss Sports Authority? When times are good, the ok are ok. When times are bad, the strong survive. BUT, survival today doesn’t look like anything we’ve seen before. I think we will see more flux — closures and consolidations, loin-girding and chain-strengthening for the remainder of 2016, especially this summer as we witness the political conventions and as we elect a new president. What comes from all of this uncertainty won’t be fundamentally different from what we know — retail… Read more »
Kenneth Leung
BrainTrust

Broad retailing is based on consumer spending, which is driven by income and sentiments. What are we are seeing are shakeouts of retailers who failed to satisfy today’s shoppers in price, assortment and availability. What worked in the past isn’t working now and those who build for the new consumers will thrive, while others with fail.

I think the upcoming US election and political instability globally will impact on shopper sentiment in the short term more than anything else.

Craig Sundstrom
Guest

With all due respect to George, growth by Amazon is hardly an indication of anything (unless of course they shrunk, which really would be an indicator … of the worst kind). And much the same could be said of cherry picking other companies.

I think we’re going to have unsettled conditions until after the election is over and then … the problems from eight years ago have never really been solved, and we’ll have to wait and see what the effect of various populist ideas — i.e. higher minimum wages at state (and even local) levels will be.

Naomi K. Shapiro
Guest

I believe I’m one of the people who wondered if the sky is falling on retail — and I don’t blame the media for these thoughts (even though the media these days is doing far too much commenting and speculating, and not enough reporting). None of us knows what’s really going to happen, but we do know that we are in a new ball game, with new players, new arenas, new behaviors, new “rules,” new top dogs; and there will be new and different outcomes.

I greatly appreciated the comments here today, which, though speculative on all of our parts, were thoughtful and cogent. Would that we had the real statistics and experience (and a couple of crystal balls) to foresee what’s going to happen, but I think we should stay tuned and be prepared for a bumpy ride.

Ken Morris
BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
5 years 2 months ago
I am “cautiously optimistic” for the state of retail for the remainder of 2016. While retail sales were down slightly for the first three months of 2016, April had the biggest monthly increase since March 2015. The surge in April spending may have been the result of consumers spending their tax refunds or buying more cars because gas prices are still relatively low (auto sales were way up), or both. I don’t think there is a Trump-Effect or Clinton-Effect that is impacting consumer spending, as the general consumer doesn’t let things like the election influence their purchase decisions. However, it may subconsciously impact their overall level of optimism or economic confidence. The disappointing sales in the department store category will continue to persist until they figure out a way to attract younger shoppers to brands that have traditionally catered to the Baby Boomers. Today’s younger consumers are shopping discount brands and fast-fashion retailers because they don’t want to spend $200 on a sweater when they can get a similar one for $20 and wear it… Read more »
Arie Shpanya
Guest

I wouldn’t say that the sky is falling per se, but it is survival of the fittest. Consumers continue to grow more demanding, whether it be anything from in-store experience to pricing, and the retailers that can successfully adapt will succeed, while the ones that cannot will struggle.

Mark Price
BrainTrust
Mark Price
Managing Partner, Smart Data Solutions, ThreeBridge
5 years 2 months ago

I am bullish on retail for 2016 and 2017. The biggest gains will be driven by improved mobile commerce and enhanced customer experience in retail stores. Retailers who have no clear position in the market — neither luxury nor discount, will still find themselves squeezed from both directions.

Ralph Jacobson
Guest

There are different stories to tell around the world on this, but let’s keep this a U.S.-centric discussion. The reports of retail’s imminent demise are greatly exaggerated. Of course this varies regionally, however retail traffic is solid in many physical stores, and where it is not improving, the decision has most likely already been made to close or relocate the stores.

The challenge is top line growth. The industry is moving more tonnage, however at lower retails, so the sales numbers aren’t impressive. Of course, there are more challenges, like realized gross margin, but external factors are still showing a relatively healthy economy in most metro areas. Spending is there, yet other contributors, like wages, are stagnant. I believe there is somewhat of a wait-and-see approach happening until the current election cycle concludes. Stay tuned.

W. Frank Dell II
BrainTrust
Retailers need growth, be it physical volume or inflation. Comparative sales is the benchmark. But the world has changed. Healthcare costs have reduced the household disposable funds. Property, income and sales taxes have increased each year. Most households have not seen a gross, much less, net income increase is 8 years, and thus inflation has reduced their disposable income. The result has been a decline in the size of middle income households. So we start with less money to spend; the question now is where to spend it. Done properly, internet sales have a lower operating cost. Buy from the manufacturer and sell to the consumers: only two product touches. Consumers are finding more and more items they can successfully purchase on-line. Example: any part you need for an outboard engine can be found at one site. They have lower delivered prices than the store down the street. Only difference is waiting 2 or 3 days versus maybe getting the part today. The net result: our definition of what sells best on the internet is… Read more »
Charles Whiteman
Guest

Obviously retail spending isn’t going to disappear. The problem is that the 5-year year-over-year retail sales trend line in the U.S. is negative. In this competitive environment where consumer expectations and omni-channel investments are driving costs up, the result is a culling of the herd.

In this environment, a growth strategy built on winning market share in the U.S. is going to be a losing approach (by definition) for most retailers. While not as common in the U.S., we work with lots of smart retailers in the U.K. who are choosing to solve this problem with a different growth strategy … they’re focusing on building sales in foreign markets that are under-served by domestic retailers. Not only is it easier to win in these markets due to lesser local competition, many of these markets offer a lot of future growth potential due to their growing middle classes.

International is a successful growth strategy that U.S. retailers are not leveraging like their European (particularly U.K.) counterparts.

Prakash Sarma
Guest
5 years 2 months ago

Retail has seen an above trendline uptick in high revenue startups and IPOs this economic cycle compared to prior ones in recent memory. As some upstarts have demonstrated opportunities abound and the consumer is alive compared to the abyss of the great recession.

Now brick and mortar retailers is a different matter. As I wrote in a recent post Retail’s Intel Moment Or Why Omnichannel As We Know It Is Dead, more can be done to reposition the store as the tip of the digital ecommerce iceberg.

While transformation is painful up close, who drives the change determines how deep and how long that pain lasts. And in what shape one emerges at the other end.

Strong leadership can make it possible.

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Braintrust
"We are at an inflection point. We are in flux."
"The media loves to play the negative angle. The best thing that could happen for retail is for the media to go away!"
"Not to be overly dramatic, but I believe there is something radically different about 2016..."

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