Retail viewpoint: Don't believe the hype

The year 2017 may have been one of apocalyptic headlines, but a lot of forecasts—including ours—still predicted that retailers would have a good holiday performance.

No one thought it would be this good.

According to advance and preliminary numbers from the US Census Bureau, retailers brought the noise this past holiday-shopping season. Core retail sales increased 6.3% over 2016's, blowing past the National Retail Federation's forecast—and ours too. Sales in November and December were absolutely explosive, accounting for 17.2% of annual sales, the largest percentage since 1999.

Every core retail sector performed significantly better than it did the rest of the year (figure 1). Not even public enemy number one—e-commerce pure plays—could stop other sectors from increasing 2.3% during the holiday season compared with the rest of 2017. There must have been a lot of happy little kids (and bigger kids) gathered 'round the tree, because the poster children of recession-era bankruptcies, electronics and sporting goods/hobby/book/music stores, had the largest increases of all: 7.4% and 4.7%, respectively.

So, it turns out that even after a year of depressing headlines about store closures and record bankruptcies, retailers had a monster holiday season. What does that teach us? That we shouldn't believe everything we hear.

In 2018, let's take everything we read in the press with a grain of salt, look beyond short-term trends, and instead trust real-world results. Some retailers are already winning by bucking conventional wisdom. And here are four ways they're doing it.

1. They don't obsess over large markets

   Your MBA professor taught you that the larger your potential market, the more attractive the business. And for a long time, traditional retailers focused on reaching the most customers possible. But these days, smaller brands are winning a lot of customers by appealing to niche markets that crave newness and authenticity. For example, sales in beauty products and packaged foods are shifting from larger, traditional players to a number of small but growing start-ups. Building a brand with a small but devoted cult following could be the way to grow in 2018. Larger brands should consider establishing and building partnerships with smaller brands and opening subbrands that deliver products to targeted-use cases and audiences.

2. They don't budget; they make bets

   Formal financial planning happens in nearly all businesses—we hope. But budgeting that focuses strictly on what the company can afford to spend can limit innovative investments.¹ For instance, a major pizza retailer rejected traditional budgeting and instead started using a betting process by looking at the expected value of projects, evaluating the risks, and placing several bets. That led to a period of incredible innovation and a stock-price surge that rivals Silicon Valley's. In other words, zero-based budgeting might make a retailer more efficient, but it also limits the risk taking that could lead to cool, new ideas. A more flexible approach could be the way to fuel innovation in 2018.

3. They don’t expand their products and channels

   Another piece of advice that retailers hear a lot these days is that they should expand product lines and increase distribution channels. Many of them have already invested in multiple fulfillment channels, endless-aisle technologies, and various drop-ship capabilities to increase their assortments. Why? Because they think it will help them compete with "the everything store." But studies have shown that giving customers too many options can actually reduce conversion rates.² Nike, perhaps taking heed, recently announced that the company plans to get more focused by reducing its assortment by 25%.³

4. They don’t control costs—where it matters

   Controlling costs has been at the top of everyone’s to-do list since the recession. But we think it’s high time to again start investing in service. According to recent studies, increasing associate payroll by $1 is associated with a sales lift of $4 to $28.⁴ Even Walmart, long known for rooting out every cost advantage it can find, said it would invest more in its workers—including by increasing starting wages—and implement a number of tests to improve service.⁵ Behavioral economics says that this approach can pay off through harder-working employees,⁶ and we are eagerly waiting to see whether it does.

To sum up, we think that retailers that fight the power of conventional wisdom in 2018 can separate themselves from the pack and trounce the competition ahead. Onward!

DATA PACK

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above, please contact retail@alixpartners.com.

¹    Studies by Daniel Kahneman and Amos Tversky have shown that considering the successes or failures of projects in isolation lead a company to avoid profitable projections. Daniel Kahneman and Amos Tversky, Prospect theory: An analysis of decision under risk. Econometrica; 47(2):263-292.

²    SS Iyengar and MR Lepper, When choice is demotivating: Can one desire too much of a good thing? J Pers Soc Psychol; 79(6):995-1006.

³    fortune.com/2017/10/26/nike-retailers.

⁴    knowledge.wharton.upenn.edu/article/out-of-stock-it-might-be-your-employee-payroll-not-your-supply-chain-thats-to-blame.

⁵    news.walmart.com/2018/01/11/walmart-to-raise-us-wages-provide-one-time-bonus-and-expand-hourly-maternity-and-parental-leave.

⁶    Alain Cohn, Ernst Fehr, and Lorenz Goette, Fair wages and effort provision: Combining evidence from the lab and the field. EconPapers; 107.