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Sunday, May 17, 2015

The Retail Revolution--An Update

As online sales have grown, it seems that retail forecasts have gone from one extreme to another. One camp simply says that retail is essentially dead while the other much smaller group claims that conventional retail will bounce back when our sluggish economy starts hitting on all cylinders again. To me, they are both a bit off the mark.

Recently, Forrester Research, the new media watchdog, has forecast that by 2018, online sales will be 11% of all retail sales. This would mean that over the next three years online would grow by 9-10% each year compounded. That is slower than in previous years for sure but keep in mind that online now starts each year at a significantly higher base than it did several years ago. Also, few are forecasting very strong growth in our GDP. Most analysts would be happy with 3% in 2015 and 2016 and right now it looks as if we might not get that.

Online sales have grown in amazing ways. For years many thought that Amazon would thrive selling only books and music. Well, many of us had it completely wrong. Sales keep soaring as increasingly people are using online as their new mall.

Speaking of malls, I have seen talking heads on both CNBC and Bloomberg say that all malls will disappear in the next 15-20 years. Cooler heads say that many are in trouble but about half will survive. A long time ad agency executive who has covered the retail beat for a generation said this about mall closings: “Yes, many will not survive. Those that will are the malls that cater to the upscale. Here is my acid test for the probability of a mall’s survival--if a mall has a Neiman Marcus, Sak’s or Nordstrom as their anchor store(s), the odds are good they will survive. Some will even get stronger.” He went on to quote a statistic that many of us have heard repeated a great many times recently--”The top 10% of American households in terms of household income are responsible for 45% of total consumer spending. Malls that cater to them have solid prospects for the long haul.”

I asked another outspoken analyst about Wal-Mart and its struggles of late. He said simply “About 50% of Americans are REALLY struggling financially right now. They are what people call the Wal-Mart nation. About 20% of Wal-Mart’s base in currently on food stamps. Sadly, these people just do not have any money. So, amazingly, Wal-Mart has gotten too expensive for them. That is why I believe the “Dollar Stores” have seen a big uptick in growth. They are the default option for the bottom portion of the bottom 50%".

Besides the high end stores, another source told me that Home Depot and Lowe’s should do well as some people no longer “underwater” on their homes will begin to put some money in to them. He also said TJ Maxx has a bright intermediate future in apparel.

One issue that I have observed of late is that analysts often are not totally in tune with the habits of the young adults. A young lady told me that she loves shoes. She literally visits Zappos (the online shoe store owned by Amazon) daily and every two weeks has them send her 6-7 pairs of shoes with a free return policy. When I asked if she thought they might be annoyed with her she smiled and said, “I buy at least two pairs per month. I am a great customer.” Showing my age I asked her if her boyfriend/fiance is comparing her to Imelda Marcos. She scrunched up her face and said, “Who is that, sir” (If you are over 50, you probably get it).

Another young adult told me that she orders all household cleaning products, toothpaste, even soap online. Every couple of months a case of Dove soap arrives at her doorstep. When I asked why she just did not go to Target or another big box retailer she said, “Why should I waste the time? They deliver right to my door and often I beat the sales tax.”

These young adults grew up on the web. Yes, some people like to shop and some do not. Getting basic items like soap or detergent online can certainly save you time. Younger people who are addicted to apps now often order coffee on Starbucks Mobile in several cities. Delivery men on scooters often take a fresh cup of java or cappacino right to you. Uber is now experimenting with delivering restaurant meals in a few cities. Very few of these millennials will ramp up their mall or store visits once they have completed most of their early purchases online. So, the brick and mortar base is aging.

All this has several implications for the retail landscape:

1) Many thousands of service jobs can be eliminated as online buying gains more traction. You also do not have to pay people as much in a warehouse fulfilling an order at 2:30 am as you do someone working on the floor of your brick and mortar store. No commissions to pay either.

2) Entrenched brands have to benefit from the online trend. Unilever must be thrilled with the young lady who buys her Dove by the case. She never does comparison shopping. Her lifetime value to them has to be huge. If they do line extensions, they can send her an online coupon in with her bi-monthly Dove order. So, as online grows, it may be harder for new products to enter many categories. The big will likely only get bigger.

3) Conventional media especially local TV and radio stations have to lose here. If speciality stores in malls (who pay most of the rent) continue to go under and retail continues to stumble, where will their revenue come from going forward? I think and have said for years that TV in particular will become much more of a direct response medium than it is today.

Are retailers aware of all of this? Ignore what they say and watch what they are doing! I have poured through a number of annual reports of publicly traded retailers and all are devoting a great deal of R&D funds to online business development.

Finally, whenever you look at the issue, remember to do fair comparisons. Total volumes of retail dollars can be deceiving. People who buy cars do not (yet) buy them online nor do they buy the gasoline that they put in them via their laptop or phone. Yet, figures for those two items are often included in retail sales. We will likely sell 16.5 million cars and light trucks in the U.S. this year. That is great but they are not competing with online as malls and specialty shops are. So, be very careful when doing comparisons.

Retail has always been a tough game. It is about to get a lot rougher.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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