The Retail Revolution Continues: Innovate or Die

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KEY POINTS

  • The retail industry is experiencing a period of revolution rather than evolution. Traditional retailers are being forced to undergo drastic changes in order to remain relevant amid a shifting retail landscape.
  • Three things characterize the current retail revolution: traditional retailers such as department stores and specialty retailers are undergoing huge changes, emerging players in different segments are increasing competition and higher e-commerce penetration is challenging brick-and-mortar retailers.
  • The ongoing changes in retail somewhat resemble the changes in the video rental industry in the early 2000s, when the industry status quo was redefined by new disruptors at the expense of those that failed to innovate. However, we remain optimistic that the retail industry is in a transitional stage that will help reshape it beneficially over the long term.
  • A look at the list of the top 10 US retailers in 2006 versus 2016 revealed significant shifts in power in the industry. Given the current, accelerated pace of change, we expect to see more new entrants to the list in the next 10 years.

The Retail Revolution Continues: Reshaping the Future of Retail

The retail industry is experiencing a period of revolution rather than evolution. Traditional retailers are being confronted by emerging competitors, fast-changing consumer behavior and the ever-increasing influence of technology in the industry. Therefore, the old guard is being forced to undergo drastic changes in order to remain relevant.

There are three main aspects to the current retail revolution:

 

1) The old guard, particularly department stores and specialty retailers, is going through severe changes, including store closures, bankruptcies and management turnover

Store closures: Store closure announcements have been concentrated among department stores and specialty retailers. Of the companies we regularly track, 12 US retailers have announced store-closing plans so far this year. Macy’s plans to close 9% of its total store base, while Sears plans to close 6% of its stores and Kmart 13%. JCPenney stated that it will close 130–140 stores, or 13%–14% of its total store base, in the next few months. Crocs announced that it will close 160 of its stores, or 29%, by the end of 2018. Lucy Activewear will close its entire store network in 2017 as it merges into The North Face. Abercrombie & Fitch announced plans to close 60 stores in 2017, after reporting sharp declines in comps for the fourth quarter. The Children’s Place is shuttering 300 stores by 2020 as part of a plan to focus its growth strategy on e-commerce.

Bankruptcies: Five specialty retailers announced that they would file for bankruptcy this year and are in the process of closing down their entire store base. BCBG filed for bankruptcy and will close all 200 of its stores. Gordmans Stores has also filed for bankruptcy and will close all 101 of its stores. Earlier this year, Wet Seal announced that it had filed for bankruptcy and American Apparel is currently going through bankruptcy proceedings. The Limited is in the process of shutting down its entire fleet of 250 stores as well as its online operation following its bankruptcy filing.

Management changes: The recent high turnover rates in retail C-suites suggest that retailers are in the midst of reshaping their strategies from the highest level. We have seen frequent personnel changes: there have been 29 recent announcements of C-suite management changes among the global retail companies we track, concentrated among luxury retailers and specialty retailers. The most notable ones include the departures of the CEOs of Ralph Lauren, Tiffany & Co. and Barneys, and the departure of the Creative Director of Givenchy.

2) New players have emerged, increasing competition in the retail industry

Fast fashion: In recent years, European fast-fashion specialists have been expanding significantly in the US market. H&M has led the charge of taking share in the US. In 2016, it generated $3.2 billion in revenue in the US market, making it a sizable competitor to its US counterparts such as Forever 21 and American Eagle Outfitters. New entrant Primark is posing more challenges to the big-box and value retailers with its low-price and on-trend merchandise. It made its grand entrance into the US market with five store openings in September 2015. Primark is expected to open 32 stores in the US by 2020, and to generate just under $1 billion from its US business by the end of its fiscal 2020 year.

Hard discounters: In the supermarket space, international entrants such as Aldi and Lidl have made plans to aggressively expand in the US. Aldi, already present in the US, is expected to have more than 2,500 US stores by 2018. Lidl, which will open its first US stores this summer, just announced that it plans to open 100 US stores in the near to medium term, and to have 630 US stores by 2023. Traditional US grocers such as Kroger, Safeway, Walmart and Meijer are going to be challenged by these new players. The two German hard discounters, Aldi and Lidl, are expected to take $53–$67 billion in market share in the US food industry by 2021.

3) E-commerce is taking a growing share of retail sales, and Amazon has become a dominant player

E-commerce is taking a growing share of total retail sales. Online sales accounted for 4.2% of total retail sales in 2010, but that percentage grew to 8.3% as of the end of 2016, according to the US Census Bureau. And Amazon has become a dominant force in online retail. The company accounted for 53% of sales growth of online retailers in 2016, according to Slice Intelligence. In 2016, Amazon recorded a 25.2% increase in sales, while the industry averaged only low double-digit growth.

screen-shot-2017-04-01-at-5-49-16-pmE-commerce’s growing share of apparel sales is posing significant challenges for department stores and specialty retailers that still generate a majority of their sales from physical stores. E-commerce is estimated to account for 17% of US apparel sales in 2017, and for 22% by 2021, but the channel accounts for less than 10% of apparel sales at most department stores and specialty retailers.

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The Blockbuster Video Analogy: Adapt or Die

The ongoing changes in the retail industry resemble those seen by the video rental industry in the early 2000s, when the industry status quo was redefined by new disruptors at the expense of those that failed to innovate. Going to a Blockbuster Video store to rent videos used to be the weekend norm before Netflix and on-demand streaming were available. At its peak in 2004, Blockbuster operated more than 9,000 stores and generated close to $6 billion in revenue. In less than a decade, consumer demand shifted to snail-mail DVD rental services and then to online streaming, as disruptors such as Netflix and Redbox changed the industry. Blockbuster filed for bankcruptcy in 2010, a little more than a decade after its 1999 IPO.

screen-shot-2017-04-01-at-5-49-48-pmThe current turmoil of store closures, bankruptcies and management turnover is likely just the beginning of the changes the retail industry will undergo. We expect to see more store and mall closures and more bankruptcies as part of the ongoing retail revolution. Green Street Advisors estimates that major store-based retailers will need to close 8%-40% of their stores in order to achieve the same level of store productivity they saw in 2006. Following the closing of many traditional mall anchor tenants, we expect 30% of the total 1,221 malls in the US to close; most of these will be lower-tier malls, we predict.

We remain optimistic, however, that the ongoing changes represent a transitional stage for the retail industry. This is different from the case of Blockbuster’s ultimate failure. The traditional retailers may be facing more challenges from newcomers, but their stores remain highly relevant in terms of driving future growth, even if they need major transformations. The silver lining for the retail industry is that store-based sales are still going to account for the majority of total retail sales. The surviving retailers are going to transform the industry into one that is more experience-driven, customer-centric and innovative.

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What is to Come?

Looking beyond the current changes, we ask the following questions about the future of the industry:

Who is going to challenge the dominance of Amazon?

As part of their reinvention, a number of retailers are focusing on building out their e-commerce platform capabilities. One or multiple retailers could emerge to challenge Amazon’s dominance in online retail. With the backing of Walmart, Jet.com could become a major e-commerce platform for brands and retailers. eBay is repositioning itself from a platform known for selling used goods to one known for selling new merchandise. Today, about 80% of the items sold on eBay are new items, so it could become another platform that challenges Amazon’s leading position.

Who is going to grab market share as a result of store closures and bankruptcies?

Are the direct competitors with stores nearby going to capture the sales freed up by store closures, or will having fewer stores entice consumers to shop more online? We have previously estimated that some $2.5 billion in sales will be up for grabs as a result of closures by just Macy’s, JCPenney, Sears and Kmart.

Are retailers going to make acquisitions to accelerate their transformation?

Retailers must build up their e-commerce operations in order to stay competitive in the face of increasing online penetration. We may see more acquisitions in areas that retailers are looking to develop in their e-commerce businesses. Walmart has already made a series of acquisitions of e-commerce companies, including Jet.com, ShoeBuy, Moosejaw and ModCloth, in order to build up its e-commerce team and widen its e-commerce offerings.

What are malls going to do when their anchor tenants leave?

With many mall anchor tenants closing their stores, malls are challenged to replace departing tenants with new retail concept stores or to repurpose some mall space in order to provide experiences and entertainment to customers.

Which technology is going to be the next game changer?

With increasing ownership of voice-based artificial-intelligence assistants, are consumers going to shift from screen-based online shopping to a voice-based interface for shopping? If they do, it will fundamentally change how brands interact with consumers.

Who is here to stay?

In just 10 years’ time, Sears went from sixth place on the list of the top 10 US retailers to the edge of bankruptcy. Meanwhile, Amazon rose to the number eight spot on the list. Given the accelerated pace of change in the retail industry, we will likely see more new entrants on the list of top US retailers.

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