Insight

Retail viewpoint: our top 10 predictions for 2018

February 2018

Brrr! Weather aside, it has been a bone-chilling start to the year for retailers. US core retail sales fell 0.2 percent in January, the biggest decline in 14 months.1 Not even the Winter Olympics could drum up enough excitement to lift sporting goods and hobby stores, which fell 0.8 percent.

Speaking of winter gear, it's February again, and we all know what that means. It's time to bundle up and check out our top 10 retail predictions for the year ahead.

  1. Even more stores will close
    Last year, retailers shuttered a record-breaking 7,000 stores. We think just as many—and probably more—will shut their doors this year. But we also think retailers will head into those tough decisions with eyes wide open. In 2018, retailers will continue to trim the fat and run store closure programs that squeeze the most value possible.

  2. Rising costs threaten to crush margins
    Rising inflation, labor costs, omnichannel investments, and price pressure from Amazon and off-price stores are chipping away at already razor-thin margins. But there's hope. The boldest retailers will turn to automation and outsourcing to cut costs aggressively and boost profits.

  3. Speedy retailers get even speedier...
    What was considered fast 10 years ago is now glacial. Retailers used to take a full year to bring a product to market. Now, some retailers—not just fast fashion—are doing it in 10 weeks. We expect many retailers (including established ones) to cut down product development time by as much as 75% this year.

  4. ...making inventory levels drop
    A faster product development cycle means retailers won't be hoarding inventory and then selling it at deep discounts. Instead, they will shift from buying in bulk each season to buying more often in small quantities, and eventually move away from a seasonal calendar. That approach makes it easier to buy products closer to the in-store date, which leads to better predictions of what is going to sell and fewer markdowns at the end of a season. This means we'll be less likely to see Eagles Super Bowl merchandise marked down in stores in March—so good news all around!

  5. Renting on the rise
    The rental market is heating up—and we don't mean apartments. Businesses that give consumers the option to rent or share products instead of buying them will get even more popular this year (especially among Instagram-hungry, cash-poor millennials). But consumers won't be the only renters on the market. Retailers have always outsourced some processes, like distribution, but we think they'll “rent” more outside resources to work on core processes like product design and development. This could help move from a fixed to variable cost structure.

  6. Supply chain investments pay off
    Everyone knows Amazon set a high bar for logistics, which they are anticipated to raise again with their Shipping With Amazon service. While some retailers are crumbling under the pressure, others are being clever and creative with their supply chains, using vacant retail real estate to handle e-commerce delivery, making big CAPEX investments in warehouse automation, thinking about acquiring transportation companies, and investing heavily in 3PLs to manage returns. We think those who invest will see their own happy returns this year.

  7. If you can't beat 'em, join 'em
    Retailers are under enormous pressure to compete online. But e-commerce doesn't come cheap or easy. This year, more retailers could get around antiquated systems and old ways of thinking by acquiring or partnering with born digital startups that already have those critical skills and processes. We expect brands to join the Amazon marketplace after playing hard-to-get for years (cough, Nike) and predict other traditional retailers will get cozy with digital natives (like Target and Shipt).

  8. Adding a human touch—without humans
    Retailers have been getting better at using technology to offer a personalized customer experience online. But this year, they're going to take it to the next level by relying more on chatbots interacting with customers in text messaging apps like WhatsApp and Facebook Messenger.

  9. Amazing in-store experiences
    “No one wants to shop in stores anymore,” people say. Well, we disagree. We think savvy retailers will come up with new reasons for people to stop by. In-store entertainment and special services should become big priorities. In fact, more stores won't hold inventory at all and simply become “guide shops,” where consumers can touch the products and sales associates can educate customers.

  10. Elephants (finally) learn how to dance
    Competition from start-ups and digital natives poses an existential threat to established retailers. For traditional retailers to survive they need to embrace a new attitude to risk, innovate, and break old rules. We see retailers saying goodbye to their “gut” and hello to data to drive decisions—like the data-led Stitchfix.

Yes, we had a chilly start to the year, but we think things could heat up soon for retailers who can adapt to the trends above. Look for more insights from us on these and other developments in the coming months.

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  Seasonally adjusted January retail sales exclude motor vehicles, gas, food services, and drinking places

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