The US Retail Revolution Solution July 7 2017 - Home - …€¦ · · 2017-07-07The US Retail Revolution Solution Deborah Weinswig ... The US retail industry is experiencing a revolution

1 DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

July7,2017

1) TheUSretailindustryisexperiencingaperiodofrevolutionratherthanevolution.Threethingscharacterizethecurrenttransformation:traditionalretailerssuchasdepartmentstoresandspecialtyretailersareundergoinghugedisruption,emergingplayersindifferentsegmentsareintensifyingcompetitionandhighere-commercepenetrationischallengingbrick-and-mortarretailers.

2) Therateofchangeseemstobeaccelerating.Retailershavealreadyannouncedatotalof5,321storeclosuressofarthisyear,up218%yearoveryear,and11retailershavefiledforbankruptcyyeartodate.

3) Amidthisaccelerateddisruption,wehaveidentifiedanumberofpotentialsolutionsUSretailerscanimplementtoaddressthefundamentalchallengestheyface.

4) Theseincludefurtherstoreclosurestooptimizestorebases,transformingthestoreexperiencebeyondthetransactionalandimplementinginnovative,all-channelinitiativestocompetewiththeconvenienceofferedbye-commerce.

Deep Dive: The US Retail

Revolution Solution

Deborah Weinswig

Managing Director

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016


July7,2017

TableofContents

ExecutiveSummary.........................................................................................................................................3

TheUsRetailRevolutionHasAccelerated.......................................................................................................31)Storeclosurescanhelpretailersoptimizetheirfleets.........................................................................................62)Storesarenotdead,buttheyareinneedofamajortransformation.................................................................83)Increasinge-commercecompetitionisforcingretailerstofurtherinnovatetocompeteonconvenience.......10

Conclusion.....................................................................................................................................................11


July7,2017

ExecutiveSummaryTheUSretailindustryisexperiencingarevolution.Traditionalretailerssuchasdepartmentstoresandspecialtyretailersareundergoinghugedisruption,emergingplayersindifferentsegmentsareintensifyingcompetitionandhighere-commercepenetrationischallengingbrick-and-mortarretailers.Therateofchangeseemstobeaccelerating.Retailershavealreadyannouncedatotalof5,321storeclosuressofarthisyear,up218%yearoveryear,and11retailershavefiledforbankruptcy.

Inthisreport,welookbeyondthecurrentturmoilandsharesomepotentialsolutionsthatretailerscouldimplementtoovercomethechallengestheycurrentlyface.Storeclosurescouldhelpretailersoptimizetheirfleetsandmanystorescouldbenefitfromamajortransformation.Traditionalretailerscouldalsobenefitbymakingfurtherinvestmentstoexpandtheirofferingsandimprovedeliveryspeed,regardlessofchannel.

TheUSRetailRevolutionHasAcceleratedTheUSretailindustryisexperiencingaperiodofrevolutionratherthanevolution.Traditionalretailersarebeingconfrontedbyemergingcompetitors,fast-changingconsumerbehaviorandtheever-increasinginfluenceoftechnologyintheindustry.Therefore,theoldguardisbeingforcedtoundergodrasticchangesinordertoremainrelevant.Threethingscharacterizethecurrentretailrevolution:traditionalretailerssuchasdepartmentstoresandspecialtyretailersarebeingdisrupted,emergingplayersindifferentsegmentsareincreasingcompetitionandhighere-commercepenetrationischallengingbrick-and-mortarretailers.

Thepaceofchangealsoseemstobeaccelerating.Legacyretailersareclosingstoresatafasterrate,whilevalue,fast-fashionandbeautyretailerscontinuetoexpandtheirfootprints.Meanwhile,increasinge-commercepenetrationispushingtraditionalretailerstoadoptnewmeasuresinthefaceoffiercecompetition.

Asofmid-Junethisyear,wehavealreadywitnessedasignificantnumbersofstoreclosureannouncementsandretailbankruptcies.Wecalculatethatretailershaveannouncedatotalof5,321storeclosuressofarthisyear,up218%yearoveryear.Also,10retailershavefiledforbankruptcythisyear;thatnumberisalreadyhigherthanthenumberofretailbankruptciesfiledinallof2016.Rue21wasthelatest,filingforbankruptcyonMay15.BCBGMaxAzriaandTheLimitedbothfiledforbankruptcyearlierthisyear,andEasternOutfittersisclosing48stores,or56%ofitsstorefleet,aspartofitsbankruptcyproceedings.SearsandKmartareclosing10morestoresthanpreviouslyannounced,andconsumerelectronicsretailerHHGreggannounceditwouldcloseall220ofitsstoresafterfailingtosecureabuyer.

Wecalculatethatretailershaveannouncedatotalof5,321storeclosuressofarthisyear,up218%yearoveryear.

Asofmid-Maythisyear,10retailershavefiledforbankruptcy,morethanfiledinallof2016.


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EasternOubicers

lululemonathledca

LucyAcdvewear

Chico’s

Guess

MCSports

Macy’s

CVS

Staples

MichaelKors

GordmansStoresInc.

AmericanApparel

BCBG

JCPenney

CrocsInc.

WetSeal

BebeStoresInc

GameStop

hhgregg

SearsandKmart

TheLimited

AscenaRetail

Rue21

Gymboree

PaylessInc

RadioShack

Figure1:MajorUSStoreClosingAnnouncements:YeartoDate2017

Gymboreeannounced it would be closing 350-450 stores.Ralph Lauren’s store closing numberwas part of the 50-store closure planannounced in June 2016.Paylesswill close an additional 296 stores if negotiationswith landlords are unsuccessful.Ascenawill closebetween268and667storesbyJuly2019,dependingonnegotiationwithlandlords.Source:Companyreports/FungGlobalRetail&Technology

Astraditionalretailersareclosingstores,value,fast-fashionandbeautyretailerscontinuetoexpandtheirstorefleetsdespitethechallengingenvironment—andmanyofthemcontinuetooutperform.However,thenumberofannouncedstoreclosuressofarthisyear,5,321asofmidJune,up218%yearoveryear)farexceedsthenumberofannouncedstoreopenings(3,262,up53%yearoveryear).AmongthenotablestoreopeningannouncementsthisyearwasSephora’sstatementthatitplanstoopen70stores-in-storesinsideJCPenneylocationsthisyear.

Total: 5,321 announced store closures

218% year over year


July7,2017

Figure2:MajorUSStoreOpeningAnnouncements:YeartoDate2017

Aldiwillcompletea400-storeexpansionbytheendof2018.Walmart’stargetof59storesincludesnew,expandedandrelocatedstores.Targetisonlyopeningstoresinsmallformat.Macy’sBackstagewillbeopenedwithinexistingfull-lineMacy’sstores.Source:Companyreports/FungGlobalRetail&Technology

Stronge-commercecompetitionhaspropelledretailerstomakeanewwaveofchangestotheirbusinesses.Weareseeingmoredirect-to-consumerbrandsbuildingtheirofflinepresence.AmazonisopeningsomephysicalgrocerystoresandbookstoresinUScities.Traditionalretailersaretakingvariousmeasures,includingacquiringonlinepureplays,tobuilduptheire-commercecapabilities.Walmart,forexample,hasacquiredModCloth,ShoeBuyandMoosejawthisyearinordertoboostitse-commerceofferings.

Weseeanumberofpotentialsolutionsthatretailerscanadopttoaddressthefundamentalchallengesoftheongoingretailrevolution.

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Forever21(RileyRose)

Nordstrom

Macy'sBackstage

Bonobos

Costco

Target

Dick’sSpordngGoods,Inc.

Walmart

HobbyLobby

H&M

Sephora

RossStores

Lidl

Ulta

FiveBelow

TJX

Aldi

DollarTree

DollarGeneral

Total: 3,262 announced store openings

53% year over year


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1)Storeclosurescanhelpretailersoptimizetheirfleets.

Whatarethechallenges?Theretailindustryisoverstored,especiallyinthedepartmentstoreandspecialtyretailerspace.Ourownresearchshowsthatfiveoutofthesevenmajordepartmentstorechainslistedinthetablebelowexperienceddeclinesinsalespersquarefootoverthepast10years.Ofthegroup,Searssawitsstoreproductivitydropthemost;itfellby124%overtheperiod.

Figure3.SelectedDepartmentStoreRetailers:SalesperSquareFoot,2006vs.2016

DepartmentStoreRetailer 2006 2016 Change

NeimanMarcus $611 $548 (11)%

Nordstrom $393 $498 21%

Kohl’s $256 $224 (14)%

Macy’s $172 $198 13%

Dillard’s $147 $126 (17)%

JCPenney $176 $121 (45)%

Sears $218 $97 (124)%Source:Companyreports

Thespecialtyretailsectorexperiencedabifurcationofstoreproductivityperformanceoverthe2006–2016period.Variousmid-tierspecialtybrandssawsalespersquarefootdeclineby18%–46%,whileoff-priceretailersenjoyedanimprovementofroughly30%.Wecontinuetoexpectmid-tierretailerstoannouncemorestoreclosures.

Figure4.SelectedSpecialtyRetailers:SalesperSquareFoot,2006vs.2016

SpecialtyStoreRetailer 2006 2016 ChangeTiffany&Co. $2,746 $2,700 (2)%

Coach* $1,959 $1,451 (35)%UrbanOutfitters* $705 $858 18%Chico’sFAS* $823 $686 (20)%

Bebe* $657 $539 (22)%FootLocker* $395 $515 23%AmericanEagleOutfitters $524 $428 (22)%

TJXCompanies* $289 $396 27%RossStores $305 $395 23%NewYork&Company $363 $375 3%

FinishLine $345 $369 7%Abercrombie&Fitch.Co $500 $343 (46)%GapInc. $395 $334 (18)%

Dick’sSportingGoods $218 $246 17%*FungGlobalRetail&Technologycalculations,basedoncompanyreportsSource:Companyreports

From2006through2016,variousmid-tierspecialtybrandssawsalespersquarefootdeclineby18%–46%,whileoff-priceretailersenjoyedanimprovementofroughly30%.


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PotentialSolutionsClosingpoorlyperformingstoresispartofmanyretailers’initialstepstowardimprovingtheirstoreportfoliosandoverallcompperformance.Thestoresthatretailershavedecidedclosearelargelyunderperformersintermsofsalesandlikelymoresointermsofprofitabilityandfour-wallcontribution.Beyondclosingpoorlyperformingstores,certainretailersneedtoaddressthefactthattheysimplyhavetoomanystores.

RealestateresearchfirmGreenStreetAdvisorsestimatesthatthemajordepartmentstoreretailersshowninthegraphbelowwillneedtoclosebetween8%and43%oftheirstorestoachievethesamelevelofstoreproductivitythattheysawin2006.

Asmallanchorstorescontinuetoclose,weexpecttoseemoreclosuresofotherstores,moremallclosuresandadditionalbankruptcies.Wemaintainthat30%ofthe1,221mallsintheUSwillneedtobeclosed,andthatmostofthesearelower-tierpropertiesclassifiedasCandDmalls.

Figure5.SelectedRetailers:PercentageofExistingStoresthatNeedtoBeClosedtoReach2006SalesperSquareFoot

Source:GreenStreetAdvisors

GreenStreetAdvisorsestimatesthatthemajordepartmentstoreretailerswillneedtoclosebetween8%and43%oftheirstorestoachievethesamelevelofstoreproductivitythattheysawin2006.

8.0%

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Macy’s Bon-Ton Dillard’s Nordstrom JCPenney Sears


July7,2017

2)Storesarenotdead,buttheyareinneedofamajortransformation.

Whatarethechallenges?Morethan90%ofUSretailsalesarestillgeneratedfrombrick-and-mortarstores,accordingtotheUSCensusBureau.Forsometraditionalretailers—suchasWalmart,TargetandCostco—salesmadeinphysicalstoresstillrepresent95%–97%oftotalsales,accordingtocompanyreports.

Figure6.PercentageofRetailSalesMadeIn-Store:1Q06–1Q17

Source:USCensusBureau

Facedwithoversizedstorefleets,outdatedin-storetechnologiesandalackofengagingcustomerexperiences,manyretailersmustimplementchanges.Atmanystores,customersfindalackofexcellentcustomerservice,agooddealoffrictioninthepurchaseprocessandno“wowfactor.”

PotentialSolutionsRetailersshouldconsidermakingsignificantchangestotheirin-storeexperiencesandbewillingtotakemorerisksingeneral.

Storescanbecomegatheringplacesthatfosterasenseofcommunity,ratherthanjustbeingplacestotransact.Peoplearesocialcreaturesandtheyneedtoengagewithothers.Makingstoresagatheringplaceandcreatingasenseofcommunityprovidesanadditionalreasonforconsumerstovisitstores,whichcaneventuallygenerateadditionalsales.

Storescanalsoserveasahubforservices,offeringtravelbooking,drycleaningandhairsalons.Retailstoreshaveanopportunitythatonlinestoresdonothaveintermsofprovidingamemorableexperienceforcustomersthatwilltranslateintolong-lastingcustomerloyalty.Thebeststoreexperienceisnotsolelyabouttransacting,butaboutmakingcustomers’timeinthestorethebestpartoftheirday,leadingtothemwalkingoutofthestoreholdingthebrandinhigherregard.

Facedwithoversizedstorefleets,outdatedin-storetechnologiesandalackofengagingcustomerexperiences,manyretailersmustimplementchanges.

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AtupdatedAppleStores,forexample,consumerscanplayandlearninadditiontomakingapurchase.ManyconsumersvisitAppleStoresnotjusttobuyaproduct,butbecausetheyenjoyasenseofgatheringthere.AthleticbrandssuchasLululemonAthleticaregularlyofferyogaclassesandrunningclubstocustomersinordertocreateasenseofcommunity.RetailersasvariedasPetSmartandUltaarealsoprovidingadditionalservicestotheircustomersin-store.AtPetSmartstores,customerscansendtheirpetstodaycampsandaccessveterinariancareandgroomingservicesfortheirpets,allofwhichdrivestoretraffic.AtUlta,beautyservicesareanintegralpartofthestoreoffering:customerscangettheirhairandnailsdonein-storeinadditiontobookingskincaretreatmentsandmakeupsessions.

Source:iStockphoto

TheVitaminShoppeisrevampingexistingstoresasexperiential“wellnesslocations,”offeringin-storebeveragebars,openspacestogather,samplingcountersandhealthenthusiastson-site.HomeappliancesstorePirchofferscomplementarycookingandbakingclassesinstoressocustomerscanexperiencetheproductsinaction.Customerscanalsoreservestorespacesforprivateparties.

Shoppingmallscanupgradetheir“retailtainment”offeringsaspartoftheimprovedshoppingexperience.TheMallofAmericahasaddedindoorrollercoasterstoitsentertainmentofferings.TheDubaiMallhasthelargestindooraquariumintheworld.ChinesemalldeveloperWandaGroupbuiltanentertainmentspaceinthenorthernChinesecityofJinanin2016thatincludesshoppingmalls,sportsfacilitiesandathemepark,allunderoneroof.

ManyconsumersvisitAppleStoresnotjusttobuyaproduct,butbecausetheyenjoyasenseofgatheringthere.


July7,2017

3)Increasinge-commercecompetitionisforcingretailerstofurtherinnovatetocompeteonconvenience.

Whatarethechallenges?E-commercecompetitorssuchasAmazonprovidecompellingoffersthatcombineconvenienceandvalue,forcingtraditionalretailerstocompeteincreativewaystodifferentiatethemselvesfrome-commercepureplays.Amazon,thedominantforceinonlineretail,accountedfor53%ofonlineretailsalesgrowthin2016,accordingtoSliceIntelligence.In2016,Amazonrecordeda25.2%increaseinsales,whilethee-commerceindustryoverallaveragedonlylow-double-digitgrowth.Thee-commercechannelhasseenthefastestgrowthinretail:onlinesalesaccountedfor4.2%oftotalretailsalesin2010,butthatpercentagehadgrownto8.5%bythefirstquarterof2017,accordingtotheUSCensusBureau.

Source:iStockphoto

PotentialSolutionsToincreasetheirprofitabilityandmarketshareintheiroverallbusinesses,traditionalretailersneedtomakefurtherinvestmentstoexpandtheirofferingsandimprovedeliveryspeed,regardlessofchannel.

Retailerscanprovidemoreconvenientlast-miledeliveryoptionsforcustomers.Astheshoppingjourneybecomesmorecomplexforcustomersandmoreexpensiveforretailers,wecontinuetoseecompaniesadoptingcreativee-commercefulfillmentsolutions.Anincreasingshareofpurchasesarebeingfulfilledthroughclick-and-collectservicesandthird-partycollectionpointssuchasneighborhoodlockers.

Click-and-collect:Integratingphysicalstoresandonlineshoppingchannelshasprovenaneffectivestrategyforcompetingwithe-commercepureplays.Physicalstoresprovideconvenientpickuplocationsforcustomers.InasurveyconductedbyInternetRetailer,morethan70%ofrespondentssaidtheypreferin-storepickuptoavoidshippingcosts,while32.2%citedconvenienceasatopmotivatingfactorfortakingadvantageofin-storepickup.Forretailers,in-storepickupoftendrivesstoretrafficandincrementalsales.Target’smanagementhassaidthatone-thirdofshoppers

Toincreasetheirprofitabilityandmarketshareintheiroverallbusinesses,traditionalretailersneedtomakefurtherinvestmentstoexpandtheirofferingsandimprovedeliveryspeed,regardlessofchannel.


July7,2017

purchasesomethingelseinthestorewhenpickinguptheirTarget.comonlineorder.

Neighborhoodpickup:Wehavealsoseeninnovativelast-miledeliveryoptionsthatutilizeresidentialneighborhoodfacilities.DropSpotisamobileappthatturnsneighborhoodstoresintopackagedeliverylocations.Customersreceivepackagesthroughanetworkofneighborhoodmerchantsandthemerchantsenjoyincreasedtraffictotheirstoresinexchange.Thecompanyhasenlistedmorethan1,000merchantsacrosstheUStobecome“dropspots”forpackages,andthatnumberisexpectedtodoublebytheendof2018.

InChina,packagesareoftendeliveredtopassword-protectedcommunitylockersthatarelocatedclosetoresidentialbuildings.Shoppersreceiveatextmessagewithapasswordtounlockthecommunitylockerandtheycanpickuppackagesattheirconvenience.

IstheOnlineMarketplacetheAnswertoCompetingwithAmazon?Weareseeingmoreretailersdeployonlinemarketplacesinanattempttoboosttheirofferingswithminimuminventoryrisk.Amazonhasledthetrend:FungGlobalRetail&Technologyestimatesthatthird-partysellersonAmazonsoldaround$69billionworthofgoodsin2015,andthosesellersareexpectedtosellmoreunitsthanAmazonitselfthisyear.

WalmarthasrampedupitsownmarketplaceofferingbyacquiringJet.comandinvestinginJD.com.HomefurnishingsretailerCrateandBarrellaunchedacuratede-commercemarketplacethatoffersuniqueproductsselectedbyitsmerchants.Thecompanycanoffercustomersmuchgreaterselectionaswellasproductsthatcomplementitsownbrandsthroughthismarketplace.

Whilethemarketplacemodelcouldbeonesolutionforretailerslookingtoexpandtheire-commerceofferings,theoptionismoresuitableformulticategory,big-boxretailersanddepartmentstoresthanitisformonobrandretailers.Marketplacesandmulticategoryretailoperatemoresimilarly,soitseemsamorelogicalstepfortheseretailers.

ConclusionTheongoingretailrevolutionisexpectedtointensify,andwearelikelytoseeevenmorestoreclosuresandretailbankruptcies.Formanyretailers,however,storeclosuresshouldeventuallyimproveprofitabilityandstoreproductivity.Afterclosingunderperformingstores,retailerswillstillneedtomakesignificantchangestotheirexistingstoreexperienceofferings.Beyondinvestments,retailerswillalsoneedtoinnovatetocompetewiththeconvenienceandvalueofferedbythee-commerceplayers.

Someinnovativelast-miledeliveryoptionsutilizeresidentialneighborhoodfacilities.


July7,2017

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJingWangResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,18thFloorNewYork,NY10018Tel:6468397017

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The US Retail Revolution Solution July 7 2017 - Home - …€¦ · · 2017-07-07The US Retail Revolution Solution Deborah Weinswig ... The US retail industry is experiencing a revolution