Insight

Retail viewpoint: fasten your seatbelts - we are experiencing some turbulence

May 2017

The sun is finally out, and so are the shoppers. Core retail sales rose in April for the second consecutive month. Not only did April show a 0.3% month-over-month increase,1 but March also turned out to be stronger than originally reported last month, according to the US Department of Commerce.2 Building materials and garden equipment sales rose 1.2%, and health and personal care store sales increased 0.8%.3 However, sales at furniture and home furnishings stores dipped 0.5% from last month, and food and beverage store sales were down 0.3% compared to March.4 Unsurprisingly, e-tailers continued to outperform the industry average of 3.6% annual seasonally adjusted sales growth.5

Speaking of e-tailer success, Warren Buffett made headlines earlier this month by declaring that “the department store is online now,” and selling almost all the company’s shares ($900 million) in Walmart. At Berkshire Hathaway’s annual investor conference, Buffet explained “that in 10 years, the retail industry will look nothing like it does now... the world has evolved, and it’s going to keep evolving, but the speed is increasing.”

The data certainly backs him up. The US is on pace for both record store closings (figure 1), and record bankruptcies in 2017, with some forecasting an even worse 2018. According to The Wall Street Journal, ten retailers have filed for bankruptcy in 2017, compared with nine retailers declaring bankruptcy (with at least $50 million in liabilities) for all of 2016.6

Retailers are certainly facing some strong headwinds. Below, we identify five major types of turbulence affecting all sectors of the retail industry. Fortunately, there are tactics retailers can use to navigate these raging forces.

Pricing wars

Similar to the pricing wars that have dominated the airline industry since the 1990s,7 retailers across all sectors, from apparel to mass merchant and e-commerce to grocery, are facing intense pricing pressures. Recently, Amazon and Walmart have been in a free-shipping dogfight, dropping minimums from $49 to $35 to $25.8 Moody’s also reports continued growth of off-price retailers in 2017, putting more pressure on traditional retailers.

Developing a pricing game-plan is much easier said than done. Simply lowering prices is not the answer. Instead, we have seen retailers across all sub-sectors use tactics like localized pricing and innovative discounting to generate margin-neutral sales lifts of 2% to 5%.9

Rising wages

The fight for increasing minimum wages continues across the US. Some states (e.g., California and New York) have already increased their minimum wages to $15/hour. These increases will hit the retail industry especially hard; 75% of its approximately 16 million workers earns $14/hour or less.10 Rising wages are forcing retailers to transform their labor models or continue to close brick-and-mortar locations as the cost to serve customers in-store becomes prohibitive.

In our work, we have seen some retailers successfully manage rising field and store operational costs by addressing areas such as, labor processes, scheduling, and spans and layers, resulting in cost reductions of 4% to 8.5% without impacting the top line.

Low on fuel (capital)

Over the past six years, the number of US retailers on the lowest and distressed tier of Moody’s rating spectrum has tripled.11 Low interest rates enabled many retailers to fuel up relatively cheaply, albeit at the expense of their balance sheets. Much of the debt was to fuel buyouts or fund acquisitions, leaving companies with fewer options going forward—especially when it comes to making long-term investments.

Leading multichannel retailers are spending billions of dollars on capabilities and infrastructure, a feat that smaller players, or those with highly-leveraged balance sheets, could find difficult to match.

Squeezed in the middle seat

While industry behemoths are threatening to squeeze out competitors, retailers face another problem. The barriers to entry have never been lower. Anyone can start selling online in minutes, even if they don’t own the product they’re selling. As a result, some niche and specialty retailers are out-competing larger, less nimble retailers. These upstarts often offer a more focused selection of merchandise, or a more personalized shopping experience.

As the “747s” of the retail industry are investing heavily on pricing and supply chain, niche players are gaining share through assortment and experience. Retailers must assess their value propositions, identify areas of opportunity, and develop a go-forward flight plan. Now is the time to do it. Some retailers are performing a rapid, internal diagnostic to very quickly assess, align, and develop a sequence of tactics to achieve their targets.

Power is with the customer

Today, customers get to choose when, where, and how they want to shop. They move seamlessly across channels like stores, online, mobile, and apps. It is no longer enough to compete on price, selection, service, access, or experience alone. Retailers must still dominate on one, differentiate on another, and be at par on all others.12

Most importantly, all of those elements must fit together to create a safe and comfortable customer journey. According to Forrester research, “Customer experience leaders grow revenue faster than customer experience laggards, drive higher brand preference, and can charge more for their products.”13 Yet, in a separate Forrester survey, only 53% of respondents actually measure their customer experience, and only 21% actually tie back their customer experience metrics to business outcomes.14

The challenge for retailers is how and where to deploy their capital to anticipate and exceed customer needs. Our experience has shown that many retailers fail to deliver for three reasons:

  1. They don't set up their operations to achieve the organization's goals.
  2. They are wasting time and resources by boiling the ocean with features and services, many of which do not add value from the customer’s perspective.
  3. They are chasing the competition and not focusing on their own business and customers.

It’s a challenging time for retailers. But with an honest assessment of their capabilities and a focused flight plan, retailers can take off before it’s too late.

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 April retail sales exclude motor vehicles, gas, food services, and drinking places.
2    US Census Bureau Advance monthly sales for retail, March 2017 (seasonally adjusted retail sales exclude motor vehicles, parts dealers and dining).
3    marketwatch.com/story/retail-sales-strengthen-in-april-brightening-economic-outlook-2017-05-12.
4    Ibid.
5    US Census Bureau Advance monthly sales for retail, April 2017 (seasonally adjusted retail sales exclude motor vehicles, parts dealers and dining).
6    “The Retail Bubble Has Now Burst: A Record 8,640 Stores Are Closing in 2017,” ZeroHedge, April 22, 2017.
7    “Causes and Consequences of Airline Fare Wars,” Morrison, Steven A., and Clifford Winston, Brookings Papers on Economic Activity, 1996, pp. 85-123.
8    “Amazon Drops Free Shipping Minimum To $25 As Target Goes The Other Way,” Forbes, May 9, 2017.
9    AlixPartners analysis.
10    “A $15 Minimum Wage Will Crush The Retail Industry,” New York Post, July 31, 2016.
11    Moody’s Investors Services.
12    “Myth of Excellence: Why Great Companies Never Try To Be Best At Everything,” Fred Crawford and Ryan Mathews.
13    “US Customer Experience Index, 2016,” Forrester, 2016.
14    “Seven Steps to Successful Customer Experience Measurement Programs,” Forrester, 2013.

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Brian Major

Managing Director, Chicago