June: Time to Reflect on the Year So Far
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June proved to be a better month across most retail categories, with many retailers beating expectations. However, the consumer still seeks value and the future remains uncertain—we saw overall consumer confidence dip 5.2% from May—although there is clearly more strength in discretionary spending at the higher end of the market.
That said, given that June is a transition month where retailers clear out Spring merchandise and prepare for Back to School, we've decided to take a break from our normal commentary on monthly comps (although we have still attached our robust, detailed information in the attached comp pack) to pause at the midway point and look back at the first half of 2011.
What better way to do that than to look at the Top 10 Predictions for Retail in 2011 that we published at the beginning of this year and evaluate how they've fared so far:
1. Cost increases may reduce profits more than expected. The rise in costs has been well documented, and we are starting now to see its impact on profits. So far, profit pressure has been most evident in Specialty Apparel and Women's Apparel, where we have seen drops in gross profit margin of 180 and 140 BPS respectively. We expect this pressure to intensify across all segments during the second half of the year.
2. "Speed-to-Market" accelerates to new levels. We expected to see transformative changes in the supply chain that would enable retailers to build upon the profit gap between "fast fashion" retailers and other specialty retailers. Our research shows that speed really does matter. Fast Fashion retailers have been outperforming their peers as reflected by an average 5.5% EBITDA over the last three quarters, compared to 1.8% for all other Specialty Apparel.
3. Inventory leverage separates winners from losers. As predicted, we saw many earnings surprises as retailers with bloated inventories from Q4 2010 experienced higher markdowns impacting earnings results. We continue to see inventories growing in many retailers, which causes us real concern for back half margins and could lead to deeper promotions and markdowns.
Source: Publically available data and AlixPartners analysis
4. Department stores consolidate and channels blur further. National department stores continue to gain traction yielded from continued work in tailored assortments and brand awareness, with comparable sales surpassing those with regional geographies. We still expect to see consolidation activity in this space.
5. PE firms go on acquisition spree. By January, we'd already seen deals and interest in many companies such as Gymboree, Jo-Ann Stores, Dots, J.Crew, and Rebecca Taylor. Since then, we've seen PE transactions involving ISIS, J. Jill, Family Dollar, 99 Cent Only, Drugstore.com, BJs, Timberland, and others.
6. Loyalty programs become "richer". As we predicted, reward programs have gotten richer as retailers have worked harder to increase customer loyalty. For example, Kroger has expanded its fuel rewards program; Safeway is testing personalized prices, coupons and club-card specials; and Best Buy has expanded its strategic partnership with Points.com. Rite Aid's Wellness+ loyalty program, which was rolled out in April 2010, now has 40 million members. It remains to be seen if this will improve long-term results for the companies or just reward existing customers with additional value.
7. "Flash" sites migrate toward traditional retail. As we predicted, we are seeing Flash Sites acting more like traditional retailers, such as introducing specific lines made for them. At the same time, many traditional retailers have jumped on the Flash Sale bandwagon, from Neiman Marcus and Saks to Walmart. We expect this to continue as consumers perceive value from limited time/limited quantity promotions. Meanwhile, look for more Flash Site launches, such as Snappy Tuna, REVERSE, Beyond The Rack, Jack Threads and Vente-Privee.
8. Walmart eliminates more grocers. Independent and regional grocers have felt even more pressure in the first half of the year as Walmart maintains its low-price position and improves benefits such as home delivery of its products, including fresh produce, deli, bakery, dairy and meat in test markets. Grocers are also being challenged by the Dollar Store space as consumers continue to trade down in their search for value.
9. Smartphones pull back the curtain on price, dial up "return on invested labor". We predicted that the price transparency afforded to the users of smartphone apps would drive retailers to compete on experience and service, rather than cost, leading to a greater focus on store labor effectiveness. This holiday season will be the season that the mobile price comparison apps come into their own. Aisle411 lets users find maps and product locations inside stores; Coupon Sherpa lets customers find lists of exclusive coupons; ShopSavvy, RedLaser, Amazon and others allow scanning barcodes to find the best prices – while a customer is standing in a store.
10. Buckle up—we expect to hit some turbulence. We predicted that the multiple headwinds involved in a slow and uncertain recovery would combine to create a turbulent environment for retailers. By now, most retailers have reflected lower sales and increased costs of goods in remaining 2011 forecasts. Leaders will be those who can respond rapidly to trends and leverage speed in order to capture market share and continue to address rising cost pressures to ensure profitable year-end results.
-Need Link to Data- As always, our complete data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for June 2011.
For comments and additional information, please reply to retail@alixpartners.com
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