The retail revolution continues. Shopping malls are under increasing pressure as retailers declare bankruptcy at a record rate. In the last quarter, H&M filed for bankruptcy protection and online competitive pressures continue to build. Think for a moment about this event; a discount retailer like H&M is still having trouble competing.
As outlet malls pop-up and the online presence for digital retailers continues to expand, it is right to question the future of retail. What companies will survive in this new environment and is the apocalypse over for the retail industry?
First, the obvious answer: the ball is continuing to roll forward regarding brick-and-mortar retail difficulties. With consumers now demanding discounts on a permanent basis, margins are compressing, and we expect this to continue. There are of course exceptions with luxury brand makers such as Louis Vuitton able to still capture consumer dollars at higher prices. But luxury retailers are still not immune to buyer softness and are doing all they can to differentiate their product to attract consumers.
Companies that appear to be making progress in the changing retail landscape have something in common. Companies that sell discounted products with scale are the ones that seem to be maintaining market share. Companies like Walmart, Costco, and Target appear to be surviving the retail transition. Essentially, these are companies that sell at a discount as part of their standard pricing strategy, which appears to be resonating with consumers.
We do not expect the retail consumer to vanish. Instead, the retail consumer will simply morph towards a new buying behavior. We expect that to continue.
We expect outlet malls to become the norm rather than the exception. We expect standard malls to attempt to adapt to the environment. Malls will morph into entertainment centers including music and other distractions. This transition has begun and will continue. Malls will need to provide an environment that is attractive and can no longer just rely on stores and brands.
I expect this holiday season in the retail space to be very strong. Interest rates are low, the stock market is high, unemployment rates are low, and discounts are becoming the norm. I expect you will see huge crowds in retail establishments. The consumer appears to be relatively strong and there will be a frenzy to capture consumer dollars this holiday season.
The real question one should ask is how profitable retailers are given their current business models. While the stores will be crowded, we will watch as companies release earnings and sales statistics in January. We expect companies that sell products at discounts to likely be the winners in the holiday season. As is usually the case, it’s not only volume that matters; revenue growth and profitability are key as well.
The perspectives outlined in our regular updates guide our investment strategies. Our outlook on retail is no exception. You can be assured we will continue to assess trends and make adjustments as needed based on economic and market trends. Our entire research team is focused on understanding the current marketplace and what the future might look like. That’s our responsibility as your investment advisor.
If you have any questions about this information, please let us know. Always happy to help.