The 2015 holiday season has made the major shifts in consumer buying patterns very clear. The rise of Internet shopping and growth of off-price retailing are mega-trends reshaping the retail industry. In 2016, retailers who want to survive will have to respond by restructuring. Internet sales are booming at the cost of direct store purchases. Customers are favoring off-price stores that offer fashion at an attractive price.
Near term sales weakness in apparel and general merchandise are adding to the pressure. Young customers are prioritizing the purchase of new technology over other goods, and the unseasonably warm weather has left many winter coats, boots, and sweaters on retailers’ shelves awaiting even deeper markdowns.
I believe that many retailers did not anticipate the change in buying patterns and the negative momentum it would bring to their stores. They did not see the rapid shift to online shopping, which often occurs in the middle of the night when customers have ample leisure time. Nor did they see how the demand for new technology would cause a shift away from ready-to-wear apparel.
I am worried about the future profitability of many leading retailers. They are now defensive against the leading Internet and off-price retailers such as Amazon and TJX Companies. They are losing sales productivity in their stores while expenses rise and management bureaucracy grows.
Here are some of my worries:
- Rapid Internet market share gains. By all indications Internet sales rose about 23% in 2015 and are likely to increase at that pace again in 2016. Capturing 51 cents of every additional $1 Americans spent online, the New York Times reports Amazon is capturing an ever-growing share of retail sales in the United States. Amazon now accounts for 26% of total Internet sales – up from 22% last year. If this rapid transfer of business from store sales to the Internet continues, and it seems it will, traditional brick and mortar retailers must look at their business structure and decide where to cut administrative staff, and which stores to close, in order to survive.
- Aggressive U.S. expansion of low price international retailers Primark, Aldi and Lidl. Funded by successful operations in Europe, these fierce competitors are accelerating their growth in the United States. Each will raise the competitive bar for traditional retailers in its path. Primark, an Irish based low-price high-quality apparel and home goods retailer, has announced 10 U.S. units for 2016 and may open more. Two German discount food/general merchandise retailers, Aldi and Lidl, will each have 2000 new stores in the U.S. by 2018, just three short years from now.
As these retailers compress consumer prices, traditional U.S. retailers will be forced to emphasize low price and low cost operations. As a result, traditional retailers will have to look at their cost structure and decide how to be lean and competitive in their pricing, staffing, and store count.
- Surge in off-price store openings. Customers like to shop for value; off-pricers are happy to oblige. Based on third quarter reports about 604 off-price units were opened in 2015, a surge that will continue in the New Year. Nordstrom opened 27 Rack stores, Macy’s opened 6 Macy’s Backstage Stores, Saks 5th Avenue opened 14 Off Fifth Stores, Ross Stores opened 66 units, Bloomingdale’s opened one store, Kohl’s is testing one unit, and Lord & Taylor is dabbling with the concept by opening one store. TJX, the industry’s dominant player and my pick for 2015 Retailer of the Year, opened 320 units in the United States. Collectively there are now 4,245 off price stores in the U.S., a 12% increase in one year! The broader retail industry is definitely not growing double-digit which means the off-price channel is rapidly taking market share from traditional retailers.
- The concept of off-price retailing is not new. In fact it is old – it used to be the basement store in most department stores. Initially off-price stores featured price reductions on branded merchandise that came from the full-price “mother” store; today brands supply merchandise in huge quantities in anticipation of off-price sales. In order to satisfy demand for discounted branded product, the brands either overproduce or repeat last year’s designs to ensure the off-price stores are full. The market share shift to off-price is obviously hurting the traditional retailers requiring them to review their cost structures including stores and staffing.
- Consumers prioritize new technology. Every time Apple introduces a new product, traditional retailers will feel a negative impact. No doubt, Apple and others will introduce new innovative mobile, wearable and portable products that consumers “must have” every year. Consumers are not likely to spend on technology and apparel at the same time. Stores will have to examine their ability to attract customers when an important new technology product launch occurs. It is a challenge that must be met by both department stores and specialty retailers through innovative thinking (something I don’t see much of these days from traditional retailers.)
- Communication with Millennials. Millennial customers are not confident consumers. They are afraid of a recession or lack of employment. They want to own less and lease more (including suits and dresses. Note: well known designers are rebelling that their clothes can be rented at a fraction of the cost through popular online sites like Rent The Runway). Millennials respond to good service and do research on the Internet before making a major purchase. They are “real-time” consumers, shopping for today’s needs and waiting until the last minute to shop for tomorrow’s events.
While servicing such demanding real-time consumers, retailers must learn to protect their franchise. A major retailer told me that the most durable franchise in department stores is coats and watches. Millennials cross-shop brick-and-mortar stores, boutiques and specialty stores, and of course online, for most other classifications of merchandise. They probably do it for coats and watches too despite the retail executive I spoke to believes.
The signs are everywhere; traditional retailers must restructure their organizations now. The cost of operating is escalating as stores become less productive. More stores must be closed. Costs must be cut and reallocated – there are too many chiefs and too few sales people taking care of the customers. There has to be an effort to make productive stores more productive and to recognize that the traditional management structure of retail stores, large and small, must give way to a new, tighter, and more flexible approach. A new industry culture needs to emerge; one that empowers associates by creating a team spirit that will be rewarding for customers, employees, and management.
The New Year has started and we will see more sales promotions and clearance sales as the month continues. On New Year’s Day we already saw a one day sale by Macy’s (which lasts two days). All stores want to mark down seasonal merchandise and get ready for the spring season. I see this as more of the “same old” approach. Innovative thinking and serious restructuring is urgently needed but only modest incremental changes are imminent. Dwindling profits will force faster change, but it may be too late for some. I have many reasons to worry about traditional retailers as 2016 gets underway.
Posted on: 2016-01-15 10:10 AM 
