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Another heartbreak for the retail sector

Another heartbreak for the retail sector

Earlier this summer, brides-to-be who had ordered their gowns from Alfred Angelo, a U.S. chain of bridal boutiques, discovered to their horror that dresses they had paid for would not be delivered. With no advance notice to employees or customers, stores were closed for good. It’s quite a heartbreak for those involved – but just one of many occurring right now in the retail sector.

This year hasn’t been kind to retailers. Consider the following:

  • More than 300 retailers have filed for bankruptcy so far this year – a 31% increase over last year.1
  • Major department stores such as Macy’s, Kohl’s and Sears have already closed hundreds of their stores and expect store closings to continue.
  • Credit Suisse predicts that, in the next five years, between 20% and 25% of shopping malls in the U.S. will close their doors as e-commerce continues to grow.2
  • As of this writing, the S&P 500 Index has returned 9.77% year to date, while the S&P 500 Retail Select Index has returned -11.76% over the same time period.


 

These troubling trends for retail as we know it are driven by several factors. First, there is currently a glut of retail space in the U.S. According to a 2016 Morningstar report, the U.S. has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita. Second, consumers are finding it more convenient to shop online for what they need rather than going to a brick-and-mortar store. According to the U.S. Census Bureau, the average growth rate from 2011 to 2016 was around 9% for online retailers versus -3% for department stores. This change also manifests itself in the rise of Amazon Prime subscriptions; in the U.S., 60% of all Amazon customers are Prime subscribers. Finally, younger consumers who value experiences more than material goods don’t have as many reasons to visit the local shopping mall.

Changes in retail trends extend beyond the mall to the grocery store. While consumers have yet to shop for the majority of their groceries online, cost consciousness has driven them to warehouse clubs like Costco and discounters like Aldi. German discount grocery chain Lidl will be entering the U.S. market this year, starting in Virginia and North Carolina. All of this spells trouble for large U.S. grocery stores.

The story is similar for grocery stores in the UK. Initially, UK grocers who had been earning excessive margins (around 6%) were pursuing a race for space. Then, UK grocers suffered a perfect storm of structural change in consumer shopping behavior in addition to a weak economy, which pushed consumers to the discount formats of Aldi and Lidl.

The shift to Aldi and Lidl was not simply around price (discounters are up to 20% cheaper than the Big Four UK grocers); these stores also stepped up the quality of their offer and increased their space aggressively to accommodate their shoppers. The established UK players were slow to recognize the threat posed by the discount stores. But after dismissing them for a number of years, they found they could no longer ignore them.

E-commerce has brought about even more changes in the way people shop for groceries. Earlier in the summer, Amazon announced it would purchase organic grocery store chain Whole Foods Market Inc. This acquisition will help the online retailer gain logistics experience and quickly establish a significant brick-and-mortar presence in groceries, an area in which Amazon has long been interested, while giving Whole Foods a chance to become more profitable through Amazon’s online shopping dominance.

But the Amazon-Whole Foods alliance is more of an exception rather than the rule; well-capitalized companies aren’t usually keen to serve as white knights saving brick-and-mortar enterprises. This was a targeted purchase for a specific reason, and this rationale won’t hold true for many of the traditional, mall-based “fashion trend” stores that are struggling in today’s environment. Many of these stores could fail in the years to come if they don’t make necessary changes to their business models.

Retail companies must continue to find ways to accept and adapt to the changing habits of buyers… or risk the possibility of extinction.

Retail companies must continue to find ways to accept and adapt to the changing habits of buyers, particularly millennials and Generation Z, or risk the possibility of extinction. Shopping malls have responded by adding higher-end restaurants, fitness experiences such as yoga and kickboxing studios, and entertainment to their standard fare of department stores and specialty shops. These new additions have helped bring back some shopping traffic.

For grocery stores, online and discount competition will likely force incumbents to pre-emptively adjust their product assortments and price points. Tesco, Sainsbury and Morrison have since responded with aggressive price cuts, sharper offers and the recognition that there is simply too much selling space in UK grocery, resulting in store closures and restructuring costs. This has obviously weighed on margins, and the established players face a constant battle to protect margins before pushing them higher. But these difficult decisions had to be made in order for bigger stores to continue to be profitable.

While heartbreak can be devastating, it can also bring about the kind of changes that ultimately lead to greater happiness in the long run. After getting past the initial pain of loss, retailers are finally starting to learn what it will take for their relationships with customers to improve—and endure.

Important Information

Companies mentioned are for illustrative purposes only and are not intended to be a recommendation to buy or sell any security.

Indexes are unmanaged and are included for illustrative purposes only. You cannot invest directly in an index.

Image credit: Garry Gay / Alamy Stock Photo

ID: US-310817-43431-1

1CNN Money. “Retail bloodbath: Bankruptcy filings pile up.” June 13, 2017.

2Business Insider. “Wall Street bank says a quarter of shopping malls will close in 5 years.” May 31, 2017.





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