The Changing U.S. Retail Landscape
Terms such as the ‘retail apocalypse’ have become synonymous with the market over the past few years, but this might just suggest a changing landscape.
Dec. 9, 2019
Due to the rise of e-commerce players like Amazon (NASDAQ: AMZN), eBay (NASDAQ: EBAY), Shopify (NYSE: SHOP) etc. the retail industry continues to undergo constant disruption. Amid this disruption, one thing remains consistent: Consumers are becoming more powerful, with the expectation of “having it all”. Today’s digital consumer is increasingly connected, has more information, and expects businesses to react to all their needs and wants instantly. This is why a myriad of newer, smaller, and tech-enabled players are stealing market share. This is leading us to a marketplace in which more brands have exposure.
The outlook for traditional retail is bleak, which is reflected in their stock prices. A basket of old school retail stocks trails a group of online retail ones and the S&P 500 index (SPX).
The recent numbers of the U.S. overall retail sales were a relief for investors which were up 0.3% in October, marking an improvement from September’s 0.3% contraction. The slowing U.S. economy and consumer spending also play a big role in the retail sector’s slowdown. The recent third-quarter earnings release of all the U.S. retailers boosted investor confidence. Walmart (NYSE: WMT) and Target (NYSE: TGT) were among the winners, raising their full-year outlooks. Losers include Macy’s (NYSE: M) which issued its third profit warning for the year and department store chain Kohl’s (NYSE: KSS), which blamed an “increasingly competitive environment” as the reason behind disappointing third-quarter sales.
The U.S. department stores have a different plan to counter competition from Amazon. Kohl’s now lets customers bring back items they bought from Amazon. The store will then pack it and send it back to Amazon, free of charge. JCPenney (NYSE: JCP) opened a store that features a spa, a barber & a fitness class as well as in-store Sephora & Disney (NYSE: DIS) outlets.
About 11% of the total U.S. retail sales are done online because there are many categories in which e-commerce isn’t competing yet. Offline gas retail stores, automobiles & grocery stores remain safe from e-commerce. These three combined make up 52% of the whole retail sector. Others like fashion and electronics face a severe challenge. U.S. retailers have announced 9,270 store closures so far in 2019, including Gap (NYSE: GPS), Gymboree and Payless Shoesource, which is more than double the openings and an aggressive follow up on 5,840 closures last year. Another threat to brick-and-mortars is that online shoppers are becoming more comfortable buying higher-value products like computers and mobile phones online. The average order value on Black Friday (2019) rose 6% from last year, Adobe said.
It is important to note the numbers in the peak season (Nov 2019 – Jan 2020) for retailers. Deloitte estimated U.S retail sales to total $1.1 trillion in this period, a 5% rise from last year. It is certain to say that e-commerce won the Black Friday month as U.S. consumers spent $57.2 billion online in November alone, according to Adobe research.
An interesting study by IHS Markit (NYSE: INFO) shows how traditional retailers are preparing for the holiday season as online sales are expected to expand 18.4% from last year.
Bigger players like Walmart and Target have successfully been able to face down pressure from e-commerce. Target has streamlined its way of selling goods, allowing customers to use physical stores as a depot to pick up their purchase. It has been the best performer (Up 90% year-to-date). Walmart has been heavily investing in e-commerce as it bought the Indian e-commerce giant (Flipkart) for $16 billion in 2018. Walmart is comfortably the largest with $510 billion in sales, more than double Amazon’s. While it is able to maintain stable revenue growth, the operating margins are contracting as it still loses money in e-commerce.
It’ll be interesting to see how the Christmas and new year sales turnout for the retail sector. Whether department stores & small retailers will be able to stand up against the likes of Amazon and other e-commerce players. Otherwise, we’ll experience even more store closures in 2020.
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