<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=1958976617683363&amp;ev=PageView&amp;noscript=1">

Industry Spotlight: US Consumer Retail Market

In 2017, Americans spent a record $6.6 billion on “Cyber Monday,” a day in which many retailers kick off the holiday shopping season online with countless sales and promotions. This spending is a 17 percent increase over last year, demonstrating that online shopping is becoming an ever-increasing part of the U.S. retail market. And it’s not just during the holiday season that e-commerce is growing. According to the U.S. Census Department, retail e-commerce sales as a percent of total quarterly retail sales has more than doubled since 2008, to just over 8.5 percent. Along the way, it’s made Amazon a behemoth, Jeff Bezos the richest man in the world and brought about the decline or demise of major brick-and-mortar stores like Sears, RadioShack, Toys “R” Us and Macy’s. So what brought us to this point?

 

The Recent Past: 2007

2007 may not seem all that long ago, but for many U.S. retailers, it was a lifetime ago. At the time, Sears stock was trading at nearly $200/share, was posting $50 billion in annual revenues and had approximately 3,800 stores. Since then, its annual revenues have dropped by more than 60 percent, total stores have been slashed by nearly two-thirds and its stock is trading at around $4/share. In fact, in March the company, which also owns Kmart, said there’s “substantial doubt” it could stay in business. The implosion of Sears is far from unique in the brick-and-mortar retail sector. Just one trip to the shopping mall and you’ll see that foot traffic is down, way down. As Time reported earlier this year, “By 2022, analysts estimate that 1 out of every 4 malls in the U.S. could be out of business.” They note this is a function of the growth of online shopping, changing consumer behavior and an increased gap in wealth.

Back in 2007, the top retailers featured Walmart, Home Depot, Costco, Sears and Target. According to the National Retail Federation, the top 100 U.S.-based retailers in 2008 accounted for $1.74 trillion in sales (domestic and international). Online sales, led by Amazon, were a burgeoning industry, accounting for just over 3 percent of retail sales. However things were transforming due to a variety of economic and behavioral reasons. A tight credit market and the decline in housing sales in 2007 were starting to impact retailers. In fact, according to the International Council of Shopping Centers, year-over-year sales growth for September 2007 was a paltry 1.7 percent, the weakest growth in five years. The economic downturn would only get worse as the Great Recession resulted in high unemployment, low wage growth and a slowdown of the global economy. The department stores that suffered the worst hit during this time were mid-price firms like Sears and J.C. Penney’s.

“By 2022, analysts estimate that 1 out of every 4 malls in the U.S. could be out of business.”

How these retailers were marketing themselves was transitioning too. Television and print advertising were still the dominant ways businesses were advertising. They combined for over $120 billion in spending in the U.S. in 2007, while Internet advertising had just crossed over $21 billion. Social media was barely a blip on the radar as Twitter and Facebook were basically brand new entities. But this would all change in the years ahead.

One other thing that, in hindsight, had a much bigger impact on the retail market than anyone could have imagined was the 2007 launch of the iPhone. The iPhone, and other smartphones like it, immediately transformed how people communicated, took pictures and even got driving directions. It would take some time for the smartphone market to mature (as well as the apps they offer), but when it did, people would use these internet-connected devices at the stores to find out product information, reviews, discounts and pricing. And they could do this all in real time. 

The Present: 2017

The Great Recession and the growth of online retail took their toll on a number of major brands. Circuit City, Borders and countless regional chains closed up shop over the last 10 years. And things for those left standing haven’t been great either. Between 2010-2013, mall traffic during the holiday season saw a 50 percent decrease.

For the online retail sector, it’s been a lot of good news. Between 2008-2013, online retail sales grew ten times the rate of their brick and mortar competitors. Of course any news about that sector needs to start with Amazon. For the 12 months ending in April 2017, Amazon had $94.7 billion in online sales in the U.S. alone, a greater than 19 percent increase over the 12 months prior. And e-commerce sales were surging for companies that are best known for their brick-and-mortar presence. Companies like Nike (53.8 percent), Target (22.9 percent) and Kohl’s (13.8 percent) all saw significant growth in their online retail channel. In fact, of the top 50 U.S. retailers (based on online sales), 43 saw their digital sales increase during this same time period.

As a result of these changes in the retail market, there’s also been rapid consolidation as these companies look to hold on to market share. The merger of Walgreens with Rite Aid and eyewear brands Essilor and Luxottica are just two examples of the 58 deals that happened in 2016 that were valued at more than $1 billion, a post-recession record according to consulting firm A.T. Kearney. The firm said strong balance sheets and slow growth were driving forces in this wave of mergers and acquisitions, a trend that they predicted would continue (and it did) through 2017.

With the growth of online sales and internet-based media, it should come as no surprise that the advertising dollars have shifted to the web too. In fact, 2017 marked a significant year in advertising, as it was the first time digital ad spending in the U.S. surpassed TV spending. Digital is expected to reach $72.1 billion (36.8 percent of the total U.S. media spend) while TV spending should hit about $71.3 billion (36.4 percent). And with the growth of the smartphone market, retailers are reaching out to consumers on their phones - delivering more personalized and targeted offers. This explains the $12 billion spent on mobile advertising in 2017, an increase of 19 percent from 2016 levels.

But the shift in advertising trends doesn’t stop there. With the advent of social media platforms like Twitter, Instagram and Facebook, retailers are looking to “influencers” to spread messages about their products and brands. According to a study conducted by RIS News and Gartner in 2017, 45 percent of retail executives expect to use social media as a major part of their marketing strategy within the next 18 months.

"2017 marked a significant year in advertising, as it was the first time digital ad spending in the U.S. surpassed TV spending."

How are companies adapting to the new normal? Best Buy, the consumer electronics retailer recognizes that people can log onto their smart phone and do comparison shopping in store. So rather than turning away a potential sale because a particular set of headphones or a toner cartridge is cheaper at Amazon, they’ll do in-store price matching. This is a win-win as they customer gets the best price and the retailer doesn’t lose out on the customer. Sure, they might not get the margin they hoped for, but the long-term value of the customer will likely turn out in their favor. Plus, if they offer things like loyalty points, store-issued credit cards or warrantee programs, this offers additional sources of revenue to offset anything they might lose up front.

Others are changing their business model entirely. Following the “If you can’t beat ‘em, join ‘em” philosophy, companies like Abercrombie & Fitch and The Limited are closing stores and refocusing their business on online sales.

The Future

So this leads us to what’s next. First and foremost, online retail will be an ever-growing part of the sector. According to Business Insider, online retail sales are projected to nearly double to $630 billion by 2020. In and of itself, that’s interesting. But when you take a peek at the numbers, you find the real emerging trend - and that’s mobile transactions. While PC-based commerce looks to have a slow, steady growth in the years to come, mobile phone transactions see a steep increase. In fact, mobile purchases look to account for nearly half (approximately $300 billion) of all e-commerce by 2020, up from around $10 billion in 2013. Considering the ubiquity of smart phones, improved technology infrastructure and payment services like PayPal, it’s easy to see why mobile phone transactions will be a significant part of the retail economy.

But this doesn’t mean it’s time to bury the shopping mall. McKinsey predicts that 80 percent of retail sales in 2020 will still happen at physical locations. The mall is undergoing a transition itself in order to stay relevant with today’s consumers. They’re getting multi-million dollar makeovers, shedding department stores and adding specialty retailers and even non-retail tenants.

The Wall Street Journal reported in 2016, “Landlords are nudging out the once-coveted big box chains in favor of sporting-goods retailers, fast-fashion chains, supermarkets, gyms, restaurants, movie theaters and other types of entertainment as they seek to keep their properties relevant in an age increasingly dominated by online shopping.”

As for the stores themselves, McKinsey notes that they too must undergo significant changes in order to thrive going forward. In a 2014 report entitled, The future of retail: How to make your bricks click, they wrote, “Tomorrow’s winners will be those who are able to transport the digital world into their stores in a manner that delights customers, builds loyalty and generates brand value.” The consulting firm cites numerous ways these retailers can digitize their business with anything from interactive shelves to virtual fitting rooms with 3D technologies to e-Tags, allowing customers to get additional information about a particular product.

There will also be an increase in the of online/offline partnerships as well as all-out mergers and acquisitions as retailers are pressured to diversify their portfolios and deliver greater value to their customers. Less than two months ago, Kohl’s went live with an Amazon section at ten of their stores in Los Angeles and Chicago. They will feature many of the Amazon devices like Echo and Fire, while also allowing Amazon returns in store.

Kohl’s incoming CEO Michelle Gass told CNBC that she’s taking it slowly when it comes to working with Amazon, telling the business news outlet, “Let's walk before we run.”

Even the biggest of the big brick-and-mortar retailers, Walmart, recognized they needed to make changes and integrate better with online retail. This explains why in 2016 they purchased fast growing e-tailer Jet.com for $3 billion in cash. At the time, Walmart’s CEO Doug McMillon said, “We’re looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that’s what our customers want. We believe the acquisition of Jet accelerates our progress across these priorities.”

But there is another big reason we will see retail M&A increasing: data and analytics. According to BRIDGEi2i, the retail analytics market is expected to reach $5.1 billion by 2020, this is more than double its levels in 2015. These analytics will impact everything from supply chain to in-store sales to merchandising. Added to that is artificial intelligence, which will allow for better, more efficient shopping experience. Take Amazon’s recent acquisition of Whole Food’s for example. Some initially saw it as an investment into brick-and-mortar retail, many believe Amazon was after the massive amounts of data of Whole Food’s customer grocery buying habits and patterns. The data could help expand Amazon’s latest pilot initiative, Amazon Go, a store without cash registers. These facilities are able to track what the customer puts in their shopping cart and bills them as they walk out the door. No longer are there long queues to stand, saving customers time.

"Online retail sales are projected to nearly double to $630 billion by 2020."

As the M&A trend continues, it’s important retailers are able to simplify and streamline the deal process in order to stay ahead of the competition. Implementing a secure content management platform like a virtual data room and post-merger integration solution will be vital to a successful retail acquisition. SmartRoom in partnership with IBM offers a solution that simplifies and streamlines the entire M&A lifecycle from due diligence to post-merger integration. By combining SmartRoom’s next-generation virtual data room and IBM’s M&A Accelerator, retailers can accelerate the realization of value.

This kind of upheaval in the retail sector is far from a rarity. From the emergence of major national chains to the rise of the shopping mall to QVC to infomercials to e-tailing, there’s always going to be changes in terms of how consumers buy products. And whoever is leading the pack today might be a distant memory 10 years from now. Only time, and the ever-changing demands of the consumer, will tell.

 

 

comments
0