|Digital: “Retail is undergoing massive industry wide transformation.”……………………………|
Bit intense transformation. EUV/ArF bits.
Is This The Death Of Retail As We Know It?
Oct. 2, 2017 9:00 AM ET
Contrarian, long-term horizon, research analyst, value
Retail is undergoing massive industry wide transformation.
Traditional discretionary bricks-and-mortar retailers are the most vulnerable.
The majority of the major department store chains are on their way out or are value traps.
Amazon continues to have a highly distruptive effect across the majority of industry segments.
Groceries and fresh food retailing will be the next segment to feel the pain.
The tremendous ructions occurring in the retail industry continue and are gaining momentum at a tremendous pace as Amazon (AMZN) and the rapid growth of e-commerce progresses. Already the number of bankruptcies in the retail industry for 2017 thus far have exceeded all of 2016 and there are signs of more to come.
Indeed, even retailers typically perceived to be resistant to the disruptive influence of Amazon and the rapid growth in popularity of e-commerce have proven vulnerable.
The Oracle of Omaha Warren Buffett considered by many to be the world’s greatest investor also chose to weigh in on the debate earlier this year, stating at the Berkshire Hathaway (BRK.A)(BRK.B) annual meeting:
The department store is online now, . . .
There are a range of signals which indicate that it is only going to get worse for traditional bricks-and-mortar retailing which makes it foolish for investors to consider investing in the industry.
Retail bankruptcies are rising at a rapid rate
North American retailers are filing for bankruptcy at a record rate this year. According to industry data over 35 retailers in the U.S. alone have filed for bankruptcy this year with some of the standout names being Toys R Us, Payless ShoeSource and Radio Shack (RSH). It isn’t the first time for Radio Shack, it filed for bankruptcy protection just a little over two years ago because of similar problems including a challenging operating environment, rising competition and dwindling sales.
Nevertheless, this time round it is indicative of an even more difficult operating environment because improved economic growth, increasingly positive consumer sentiment and the involvement of a major partner Sprint (S) was unable to save the business.
Retail’s woes aren’t solely confined to the U.S., Sears Canada filed for bankruptcy back in late June and the outlook for bricks-and-mortar retailing north of the border is not much better than the U.S.
The bad news doesn’t stop there, many major department store chains focused on cutting costs by reducing their operational footprint through store closures because the unprecedented competition created by e-commerce and Amazon has left very few other options.
One-time industry leader Sears (SHLD) is aggressively closing stores in a desperate bid to survive. The embattled retailer closed 180 stores during the fiscal year 2017 and plans to close another 150 by the end of its fiscal third quarter which amounts to roughly 10% of its remaining Sears and Kmart locations. For the second quarter revenue fell by a deeply worrying 23% year over year while comparable store sales declined 11.5%.
The massive reduction in Sear’s store footprint means there is little chance of it being able to bolster revenues or address growing liquidity issues which means it is only a matter of time before it to files for bankruptcy protection.
Department store chain J.C.Penney (JCP) which saw second quarter comparable store sales slip by 1.3% year over year doesn’t appear to be much healthier. It has also embarked on an ambitious restructuring strategy which involves closing 138 stores over coming months.
Nonetheless, it does appear to be in better shape than Sears.
Long-time industry stalwart Macy’s (M) is also planning to close 88 stores and layoff thousands of employees.
These are only the tip of the iceberg representing the most prominent casualties of the apocalyptic disruption that Amazon has brought to disruptive influence that has sparked a revolutionary transformation in the industry.
Disruption is accelerating across all industry segments
It is hard to see any respite ahead. Amazon has made it clear that it plans to continue expanding at a rapid rate while demonstrating the nimbleness of its business model and ability to learn from mistakes. It failed to truly enter the $800 billion grocery and fresh produce segment in any meaningful way but after a decade of failed experiments it has decided to change tack adopting a new strategy focused on physical stores.
Amazon has taken the fight to grocery and fresh food retailers by acquiring upmarket foods retailer Whole Foods for $13.7 billion and it launched that campaign by aggressively cutting prices at Whole Foods stores. This is an intelligent move because the Food Marketing Institute and Nielsen forecasting that online grocery sales will represent 20% of all grocery sales and be worth $100 billion by 2025.
According to the report grocery shopping’s transition to online will occur at a far more rapid rate than other industries that have already done so such as banking or media because of a greater acceptance of e-commerce among consumers.
Younger, newer and more engaged digital shoppers adopt digital technologies more quickly, and will hasten the expansion of digital grocery shopping further.
The acquisition of Whole Foods along with a strategic focus on expanding grocery sales will not only give Amazon’s growth yet another leg up but will bring it head to head with grocery giants Wal-Mart (WMT) and Kroger (K).
Given the massive impact that Amazon has had on department stores and other smaller discretionary bricks and mortar retailers it is not difficult to see the same phenomenon occurring in the grocery segment. Initially it will have the greatest disruptive effect on smaller grocery chains that lack the capital to take the fight to Amazon as well as eventually Wal-Mart and Kroger.
E-commerce is growing at a faster rate than retail sales
The full potential of e-commerce and online retailing has yet to be realized. For the second quarter 2017 only 8.9% of all U.S. retail sales were made online but there has been considerable growth in the value of those sales with them totaling $111.5 billion or 4.9% higher compared to the previous quarter and a whopping 16.2% increase year over year.
The growth of e-commerce sales since 2008 has been at an exponential rate as the graphic illustrates.
Source: U.S. Census Bureau.
In a stunning revelation of just how fast e-commerce sales will grow, the National Retail Federation has forecast that as a proportion of total retail sales they will expand by 8% to 12% annually. This is around three-times greater than total retail sales, indicating that e-commerce’s share of total retail sales will grow at a rapid clip.
In the words of NRF chief economist Jack Kleinhenz:
It is clear that online sales will continue to expand in 2017 and provide growth for the retail industry, . . .
This only serves to underscore the mounting apocalypse facing bricks-and-mortar retailers.
Traditional retailers are emerging as value traps
For the reasons discussed investing in bricks-and-mortar retailers is becoming increasingly unappealing and risky. The depth and breadth of the industry’s transformation coupled with rapidly changing technology as well as an increasing appetite among consumers to accept technological changes places almost every bricks-and-mortar retailer under threat.
Clearly, the halcyon days of Sears, Macy’s and J.C. Penney are over and it is difficult to see how venerable dividend stock discount retail chain Target (TGT) can secure its future. While it has weathered the storm better than other department stores it finds itself caught between Amazon at one end and Wal-Mart at the other which is using its deep pockets and scale to establish a solid online presence and protect its bricks-and-mortar franchise where viable. That means Target will continue to be squeezed, potentially leaving it just as vulnerable as Sears or Macy’s.
To claim that retail is dead or dying is nothing short of hyperbole. The advent of Amazon and the disruptive effect that it and e-commerce is having on retail may well spell the end of traditional bricks-and-mortar department as well as smaller discretionary retailers it does not mean the industry is dying. Retail sales continue to expand at a solid clip and that can only continue as overheads as well as profit margins fall and the economy expands.
What it has essentially done is trigger a massive industry wide transformation which has caused discretionary spending to move online and provided consumers with far greater flexibility. Those retailers that can more than adequately respond and transform their operational models to become profitable will survive.