On the eve of when most retailers will report their year-end results and wrap up a fiscal year that was marked with more than 7,000 store closings and with a drastic shift of buying to internet providers, it is appropriate to review the opportunities and challenges they face.
There are many opportunities for traditional retailers to regain momentum in the coming year, even as the large shadow of Amazon hovers over the whole industry. They just have to step up. One has to realize that much of the revenue Amazon generates comes directly from brick and mortar vendors. Retailers were asleep at the wheel; it was the lack of invention or innovation by traditional stores that allowed Amazon to enter so many businesses.
Today, Amazon has $175 billion in sales and is gearing up for even higher numbers. It expects more sales with food and with new technology ideas such as Amazon Go, and a bigger push into Amazon Plants and Amazon Books — all will be found in physical stores throughout the United States. I think that Amazon’s management now realizes that some merchandise should have a store presence.
But, fundamentally, Amazon is really not a retailer. It is a superb technology company that has mastered how to sell everything cheaper and quicker on the internet. That expertise will help Amazon grow in many areas, especially food and commodities. But, I believe it is harder to translate that approach and be successful in fashion since many customers want to try a garment for fit and feel the fabric for comfort. It is likely that Amazon’s apparel offerings will not be nearly as successful. While they are looking to physical stores for some products (Amazon Go, etc.), they seem to miss the point when the customer often still has a desire to shop for style and trends. The returns could be awful and very costly. And, it probably will make the classifications unprofitable.
Bottom line, Amazon doesn’t get it right all the time. Nonetheless, this “non-retailer” has forever changed the retail marketplace. Amazon has taught all of us how to act quicker. Amazon offers deliveries to prime customers are in two days and even faster in some cities. Traditional stores are also trying to deliver within a day or the same day. Last week, a purchase at New York’s Zabar’s arrived at my home before I got there – 12 blocks away! The effort to be more service oriented like this will be the hallmark of any successful retailer in the years to come.
Larry Haverty, the erudite and savvy portfolio manager at Gabelli Funds, recently worried about the fact that the U.S. Government may soon split up Amazon much like the way Standard Oil was broken up. That company was split into 20 pieces after Standard Oil had gained control of about 30% of oil production and 90% of oil refining. Haverty feels that Amazon controls the dominant share of e-commerce and can now can charge a fee – called Prime – that others cannot hope to match.
But, e-commerce is still a small share of total retail sales (I estimate it to be about 15%). Certainly, it is growing relentlessly – since many people, especially young millennials, like to shop at 11 p.m. or whenever they like from anywhere they choose. However, I think all the competition will prevent Amazon from becoming a true monopoly (e.g., competition from aggressive efforts by traditional retailers and that other giant – Walmart).
While I do not see a breakup of Amazon happening, I do see some other changes ahead that can, and will, reshape the retail landscape.
- More stores will close. Whether it is Soho or Madison Avenue in New York City, in Washington, D.C., Chicago or Los Angeles or in many other cities in the U.S., I already see a lot of empty stores today. Closures have occurred across the industry – caused by both national chains that have shut unprofitable units and smaller entrepreneurial stores that do not have the will nor means to survive. Toys “R” Us, Bon Ton. J.C. Penney, Sears, Kmart and other companies have already announced more closings for fiscal 2018. That certainly will continue to shake things up, but it won’t end there. I expect some may not survive at all if they don’t make some other fundamental operating changes.
- Speed is important and will matter…throughout the supply chain. I have already mentioned how speed of delivery of goods to the home has picked up. However, I have also seen retailers cut their delivery from their suppliers by half. It started with Mast Industries (for Limited Stores) accelerating deliveries from overseas sources. Today, computer-assisted ordering and sophisticated production speeds goods to stores in half the time. Those initiatives reduce inventories and add to profits, and every retailer needs that.
- Rent vs. buy as a business model is increasing. According to AlixPartners, rental instead of buying is becoming more popular among consumers this year. Instagram hungry, but cash poor, millennials trigger the demand. I have watched Rent the Runway grow as a retailer. At the same time, AlixPartners also notes that retailers have always outsourced some processes like distribution, and they think there will be more outsourcing on core processes like product design and development. ‘Renting’ these capabilities vs. buying them for in-house use could help reduce the fixed cost structure and create a more variable structure that is less costly.
- Innovation is a must. And it must take place in all sorts of ways. Whether it is a pop-up department or a new look for a sportswear department, stores must change the way they are designed and what they merchandise, to attract customers. And, it is important to embrace technology as a basic way they look to provide better service. Technology has advanced to make customer recognition possible and desirable. An app to guide customers through the store to find a wanted item is a must.
- Controls are important. In order to survive, retailers must control their inventory and take action when necessary. They must have agiler and more flexible merchandise plans and be pro-active in stores – or close units that cannot respond.
- Leadership should contract. Retailers must cut their executive suite – and simultaneously empower line associates to make more decisions. Stronger customer connections and useful feedback that keeps the business focused will result.
- E-commerce must be enhanced. Every retailer will benefit by integrating its e-commerce business into its core plans more seamlessly. They should update their site frequently since the competition is very sophisticated and creates new challenges every day.
To me, these ideas set up opportunities. I am optimistic that 2018 will see a positive trend in sales and earnings for those retailers willing to make changes. Amazon will not relent this year, and Walmart will keep chasing new business as well, so a sober approach, and a willingness to make change is imperative. For too many years retailers did not want to make waves – did not want to change their operations. Those days are over, and inventive, innovative merchants will be the winners.