Is there a retail apocalypse?
You could be forgiven for thinking so. Hardly a month seems to go by without a major retailer announcing some trouble. Even the iconic Macy’s announced earlier this year it would slash 10,000 jobs.
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Judging by recent headlines, things seem to be going from bad to worse, with both The Week and Business Insider calling the industry’s troubles a “retail apocalypse” while The Atlantic used the slightly more restrained “retail meltdown of 2017.”
The headlines, though, don’t tell the whole story. “The media is so focused on the negative aspect,” says Jeff Macke, an independent investor in San Diego. “There is a trillion dollar opportunity in retail.”
The truth is that retail sales are doing just fine. It’s not Armageddon at all. In March, retail and food services sales grew 5.2 percent from the same period a year before, according to seasonally adjusted data from the Federal Reserve Bank of St. Louis. Twelve months ago the rate of growth was below 2 percent. That’s an acceleration in sales growth, which contrary to the headlines means things are getting better.
The issue is that the spending surge hasn’t blessed all retailers. Traditional retailers, such as Macy’s (ticker: M), Staples ( SPLS) and Sears Holdings Corp. ( SHLD), have suffered, closing multiple stores that have been a presence in shopping malls for decades.
The share prices also tell a tale of two retail sectors on divergent paths. For instance, while Macy’s stock has lost close to 7 percent in the year through May 9, online retailer Amazon.com ( AMZN) has prospered, with the stock up slightly more than a third over the same period. That chasm between traditional firms and those operating online will likely widen further.
“We’re on the precipice of a major restructuring of the retail landscape, but not necessarily an apocalypse,” says Terry Gardner, a portfolio strategist at C.J. Lawrence in New York. “Amazon — no surprise — is the catalyst.”
Big changes ahead. In short, consumers are shopping more online, an area Amazon dominates.
Fitch Ratings expects about 70 percent of all retail sales (except those with low online penetration like auto, gas, and food) will happen in stores by 2020, down from roughly 80 percent today, according to a recent agency report. Although they will still account for the majority of sales, traditional retailers are under pressure to change.
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Retailers that don’t keep up with consumer preferences and that don’t make compelling offerings will see their revenue hurt, a trend that won’t be reversed. In fact, it may even get worse.
Survivors “must be able to ‘showroom’ goods and deliver on-site and to-the-home in real time at lowest cost.” Showrooming involves placing goods in a traditional store so that consumers can inspect them physically. Then, as Gardner says, the retailers must be able to provide a choice of delivery alternatives at competitive prices.
“Only the leanest, most efficient survive in that model; margins will continue to erode, so scale becomes critical,” he says. In other words, big companies will have an advantage over small ones.
The changes in consumer preference will alter the landscape of shopping malls. “The emergence of Amazon and a myriad of smaller online competitors will likely result in a net reduction of the physical footprint of retail giants such as Target ( TGT) and Wal-Mart ( WMT),” says Joe Brusuelas, chief economist at professional services firm RSM in New York. The result may be more vacant retail units.
Fitch still sees a role for shopping malls but says that mid-tier apparel retailers will face some headwinds. Specifically, those relying on their own company-branded products will be at a disadvantage relative to department stores that have a variety of different branded products, the report says.
More to come? The changes in retail aren’t over yet and could be accelerated if import duties or similar trade barriers are introduced.
“Should the tax reform being considered by Congress, such as the border tax, be implemented it would likely cause a much more rapid acceleration of those structural changes that have been in place for some time, radically altering the domestic retail landscape,” says Brusuelas.
The border adjustment tax, despite its name, is really a tariff on imports of finished goods. Nevertheless, imported goods would be more expensive for retailers to purchase, and the costs would be passed on to consumers.
In the ultra-competitive retail environment, consumers have become adept at bargain hunting, which could encourage even more people to shop online, not less.
[See: 7 Dividend Stocks to Benefit From Trump Tax Changes.]
Still, given the glacial pace at which legislation moves through Congress, the odds of a border adjustment tax happening soon are slim.
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Is the Retail Business Facing Apocalypse? originally appeared on usnews.com
