By Ann Train
Despite predictions that a retail apocalypse is eminent due to record U.S. store closings in recent years, retail performance overall has more than weathered the storm. Changing consumer preferences, technological advancements, oversupply of large-footprint legacy stores, compression of the middle class, and resurgence in spending are all contributing in various ways to a fresh retail landscape where new models blur traditional channel lines.
In late September 2017, Fung Global Retail & Technology, which tracks select large retailers primarily in the apparel, department and warehouse segments, revealed that 6,101 stores closed this year, and 3,381 stores opened; fallout is attributed in part to overbuilding of physical stores. According to Fung, after an extended period of store expansion, the United States topped the world with 23.5 square feet of retail space per person in 2016.
Among the 1,804 retail chains with 50-plus U.S. stores in the 10 vertical segments IHL Group tracked, for every chain with a net closing of stores, 2.7 companies realized a net increase in store locations in 2017. Based on IHL Group's Debunking the Retail Apocalypse report, this year has seen a total net increase of 4,080 stores, including retail and restaurants, with 5,500 new stores scheduled to open in 2018.
As an indicator of renewed confidence in the economy, U.S. retail sales through July were up $121.5 billion year-over-year, according to IHL Group. All totaled, chain stores opened 14,248 locations and closed 10,168. Categories with the highest sales growth included convenience/gas, do-it-yourself/home goods, off-price mass merchants, and cosmetics/vitamins retailers. Sporting goods and department stores saw sales decline. "We're still very bullish on retail," said Henry Helgeson, co-founder and Chief Executive Officer of Cayan LLC. "When you look at consumer spend, it's actually going up in-store, and that's creating an opportunity for SMBs and retailers that are more nimble and have a more future forward vision."
The Strawhecker Group's Acquiring Industry Metrics database offers insights directly from the retail trenches. It collects and aggregates merchant level data anonymously from nearly 30 merchant acquirers representing more than 3.5 million card-accepting merchants. In collaboration with the Electronic Transactions Association, Strawhecker released its latest U.S. Retail Spending Report Card in September.
Of the 27 retail categories measured, only discount stores exceeded 10 percent year-over-year (YOY) growth in same-store sales, yet a number of categories performed well. "Consumer confidence levels are extremely high, and we're seeing that translate into spending," said Jared Drieling, Director of Business Intelligence for The Strawhecker Group, noting that 3 to 4 percent YOY growth in same-store sales is considered healthy.
"Probably the biggest trend we've seen in the first half of 2017 is an explosion in household-related goods sales, primarily due to bounce back in new and existing home sales," Drieling said. As a result, sales at household appliance, floor covering and carpet, and furnishings specialty stores spiked 6 to 8 percent above last year's totals.
By contrast, niche retailers such as sporting goods, jewelry, book and electronics stores have faltered. "As more consumers gravitate toward one-stop big-box retailers like Target and Wal-Mart, niche specific companies like Best Buy have struggled," he said. "When you look at the Costco model, which sells a wide variety of things, including cars and caskets, it's almost like a physical Amazon store. I think we're going to see more of that."
To accommodate changing consumer preferences, shopping centers and malls must adapt. Design consultancy firm CallisonRTKL envisions malls of the future as encompassing mixed use residential, office, hotel, restaurant, grocery, retail, cinema and public plaza spaces, with parking and transport hubs all contained in one complex.
Some malls have already made adjustments. "Today, we go to the mall for more than just shopping; we go for dining, entertainment, fitness, health information, classes, services and more," wrote Deborah Weinswig, Managing Director at Fung Global. "We expect retail to continue to be a big part of the shopping mall, but experiences and technology will grow to play a more prominent, if not leading, role at some mall properties."
International Council of Shopping Centers Vice President of Public Relations Stephanie Cegielski has observed similar trends among the organization's 70,000 members. "We are seeing a variety of tenants moving into vacant spaces," she said. "They range from fitness centers to health care facilities, movie theaters to artisan markets. Landlords are finding new ways to fill space based on demographics and demand in their local community."
Since a majority of retail purchases still occur in-store, having a physical presence remains paramount. "Retailers are more top of mind for consumers when there is a physical location nearby," Cegielski said. "Consumers want the option to purchase online and in-person, so a retailer who offers both tends to fare better and have more brand recognition. A retailer that leaves a market tends to see a decrease in online sales in that market, as consumers forget about them and turn elsewhere to make their purchases."
Even online giants like Amazon recognize the value of physical stores in the retail mix, as evidenced by its physical entry into the grocery, convenience and bookstore segments. Cegielski said that to address the blending of channels, we may see department stores downsize their footprints and incorporate technology that enables them to ship items directly to customers' homes and keep minimal inventory in retail stores.
Cegielski also anticipates further growth in the food and beverage categories, which include restaurants, food halls and even new grocery formats. To comprehend the size of physical retail, 115, 892 shopping centers across the United States collectively generated over $2.64 trillion in retail sales in 2016, based on CoStar Realty Information Inc. data.
Beyond its global research and advisory services, IHL Group developed a subscriber-based lead generation system called Sophia, which tracks IT spend for over 5,000 global retailers and restaurants based on 300 types of technology. It has proven to be an essential resource for technology providers interested in targeting specific merchant systems due for replacement. It also provides contact information on retail decision makers.
"An algorithm takes into consideration what that particular retailer has installed, when they installed it, the name of the vendor and when it is due to be replaced," said Greg Buzek, President of IHL Group.
According to Buzek, about a third of retailers have decoupled their IT investments from the previous year's sales, meaning they no longer base their current IT budgets on the prior year's revenue. Another third have yet to complete EMV (Europay, Mastercard and Visa) implementations, and the last third are planning to continue using legacy systems.
"The group that has decoupled IT is absorbing what's being left behind by the last group that's not investing," Buzek said. "You don't have to outspend and outrun Amazon; you just have to outspend and outrun the weakest competitors in your marketplace. And that's literally what's happening."
He said the decoupled group averages three to four major IT transformations at once, for example, investing in sales associate tools and unifying systems to lower supply chain costs, as well as enable viewing of customer data to deliver loyalty in real-time.
Helgeson believes EMV implementation created a 24-month gap in product innovation and investment by retailers. "But now that we're beyond that, we are seeing retailers evolve and tailor their retail outlets and their shopping experiences to how consumers want to shop," he said, adding that unified commerce, the ability to buy online and return in-store, or buy in-aisle for home delivery are paying dividends in the short-term.
For payments industry contenders, technology investment is a long-term endeavor. "How this impacts our industry is the companies that have not spent the last five years investing in technology are going to fall flat," Helgeson said. "They're going to be the legacy providers that are working with these legacy merchants. "We're one of the companies that have made a substantial investment in the future of commerce, and we're six years into the investment right now. The old way of doing things in our industry was to build features, not full products, and those features could be a six-month development time and generally 12 months to market."
The new way of doing things is much more complex. "It's not features; it's platforms you've got to build, and that's a multiyear investment," Helgeson noted. "Our focus is on the products that we're going to release at the end of 2018." Technology requires vision, and building teams to execute on products that support that vision takes time.
According to Helgeson, growth in up-market fashion and other retail segments, as well as down-market merchant segments, presents new opportunities. "When we look at the compression of the middle class and going from dining out to QSR, they still want the same type of food, although now it comes in a different format," he said. "Consumers are looking beyond McDonald's for a QSR that has more flavor, more of a touch to it."
Also worth consideration are smaller towns that cannot support large-scale stores in the formats these stores require. "We are still pretty bullish on the SMB pharmacists in these underserved smaller population markets," Helgeson said. "We're also seeing exceptional growth in hardware and do-it-yourself stores, as well as in stadiums and venues."
Transformation in retail is nothing new. To put it into perspective, in 1990, there were four Walmart Supercenters. By 2000, more than 1,500 Walmart Supercenters had opened, and over the same period 2 million small businesses folded.
"We're actually seeing the exact opposite happening now," Buzek said. "The Amazon ecosystem is allowing small businesses to grow and grow locations, because they can tap into a market they never had access to, and they're impacting the larger guys accustomed to people having to shop."
Today's consumers need a reason to shop when and where they do. "The successful merchants are the ones that are investing in technology, which opens a great door for the payment players that have the right technology and have invested alongside these retailers," Helgeson said.
The ultimate winners will be the retail and payment partners who can collaboratively deliver connected payment shopping experiences that match the personal lifestyle demands and demographic preferences of generations converging on retail technology in a 24/7 world.
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