Yes, some retailers are going out of business. When you see once-popular brands like Aeropostale, American Apparel, Wet Seal and Sports Authority filing for bankruptcy, it can scare investors out of the market.
Yes, others are shutting down a large number of stores. Macy’s (100 stores), Wal-Mart (154), Walgreen’s (200), J C Penny (73 done, 7 more this year), Office Depot (300 over the next three years) and most recently, Sears Holdings (64) likely top this list.
But isn’t it true that the teen-focused Aeropostale group may have simply misread their customers’ needs? And isn’t it also true that a reduction in stores by the others may be with the view to divert investments elsewhere, where the benefits may perhaps be greater? Or does it mean that it’s all doom and gloom for retail stocks? Let’s find out.
The Retail Sector Is In Transformation Mode
When Amazon AMZN started selling books online, not many would have thought it could create the kind of disruption that it has. Yes, there are other online retailers like eBay, Etsy, Groupon, Blue Nile, etc. But none have really taken the concept to the level that Amazon has, through its technology, its automation, its fulfillment standards, free shipping, Prime loyalty program, devices, you name it. In fact, Amazon has set a certain standard of service that customers, especially millenials, have come to expect. Since they have grown up with technology, they feel comfortable with it. The youngest consumers are important for every seller because this is the demographic that represents the future. And this is the problem, in a nutshell.
Customer Acquisition Has New Dimension
The habit of consuming information online continues to extend to products, practices and prices. When customers don’t spend time researching these things, they increasingly listen to music, watch video, play games and spend time in social networks from their smartphones or other connected devices. Their habits, likes and dislikes are therefore known to big technology players like Facebook, Google, Twitter and Apple AAPL as well as a host of other smaller players. Facebook in particular is important because it has broader appeal across different age groups, and so offers access to them.
Naturally, technology companies don’t share this valuable asset but instead welcome retailers to leverage the knowledge to advertise with them. This is not an ideal situation for retailers since they are losing access to customer data and direct interaction with them, which in turn is affecting things like customization and the ability to compete. But in order to make the most of an unfavorable situation and speed up the process from advertising to sales, they are increasingly using direct-response formats.
Retailers are also trying to strike the right balance between online and offline channels when seeking customer data. While more data makes it easier to serve people, not everyone has the resources and expertise to leverage the data. For instance, recent Forrester Research data reportedly says that retailers use just a third of the data they currently have with only 29% admitting they are good at translating the result of data and analytics into measurable business outcomes. There is also the danger that too much interaction with customers may feel intrusive. Further, not all customers (especially younger ones) like dealing with people, so they may not be looking for the personal touch. This also makes data collection difficult.
Given the number of options available both online and offline, customers generally have too much choice. So the older model of stocking up on inadequate quantities of a broader selection to target more shoppers may not be that effective today. Selling fewer items that are always in stock is likely to satisfy them more, according to a MasterCard study for 2015.
Inventory Management Has Never Been More Important
At some point or other, we’ve all had this urge: seeing something pretty that we want to pick up immediately. Earlier it used to be in a shop window and these days, it’s generally online. So for a retailer advertising online, it’s very important to be in stock. When a customer clicks through on an ad, the purchase intention is generally high, but many will move away if it means waiting for the right size or cut. This is especially true in case of commodity-type products or food. The purchase intention will also be depleted if they have to wait too long for fulfillment or are required to pay for shipment. So retailers need to be able to track and transport inventory quickly using efficient logistics and at minimum cost. With minimal scope for personal interaction, customer loyalty boils down to availability and ease of completing the transaction.
Employee Productivity Increases Are A Must
Many retailers are seriously looking at their corporate structures to eliminate unnecessary management layers and speed up operations. Efficient and helpful sales staff that can take on adjacent duties when required and operating in a more flattish structure is the need of the hour. This is because footfall to stores continues to decrease (RetailNext Performance Pulse says that store traffic declined 6.6% in August, following persistent declines in the preceding five months). Therefore, revenue per employee has to be pushed up in other ways, which may be achieved by expanding roles. One example would be by equipping store sales staff with connected devices so they can check online inventory when required and place an order for the customer. Moreover, better-trained and more capable sales staff will also be able to increase conversions in stores, which will help retailers make the most of the traffic declining though it is.
In-Store Experience Remains Important
There are many aspects to the shopping experience that can be worked on and this is one aspect that retailers are spending time and resources on. Apart from adding merchandise and increasing selection, retailers are using technology to track customers and push promotions to them at suitable times, reduce waiting time at the billing counter, enable more variety and security in payment options while also letting them experience the personal element. On the other hand, routine functions such as locating and fetching products or tracking shelf space for replenishing are increasingly being automated. The adoption of beacons has been much slower than initially expected across retailers but IoT is bringing technology to them in other ways.
Consistency In Online And Offline Experience Is A Challenge
Most large and medium size retailers and big brands have built websites and mobile apps in addition to their retail outlets and those that haven’t are expected to follow soon. In fact, market researchers and industry experts expect 2016 to be a momentous year for omnichannel buildout. While an online presence increases exposure to many more customers, it also calls for a consistent experience across a retailer’s online and offline properties. On the other hand, even large online retailers need offline presence as is clear from Amazon’s plans to open some physical retail stores this year and a 100 pop up stores next year. For retailers, this consistency of experience is a very big challenge because it requires investment in technology at every level, from supply chain management to procurement to stocking, store layout, sales and customer relations, and may in fact require a re-design of the entire process. This won’t get done in a hurry and will require significant investment over the next few years.
Security/Privacy Is A Growing Problem
As retailers do more business online, they will increasingly be subject to many rules and regulations that normally apply to online operators. Most of these regulations relate to the all-important customer data collected, whether in-store or online.
Developments over the past few years have greatly increased awareness of the way customer data is being collected and used leading to concerns about individual privacy. Data breaches at leading retailers have also raised concerns about security and identity theft.
This year saw the EU parliament pass the General Data Protection Regulation (GDPR), which should go into effect by 2018. The law is designed to hand over more control to the person the data relates to and provide a uniform playfield across the region. Data portability across processing systems and an individual’s right to erasure are other things covered. A fine of 20 million euros, or 4% of total global revenue have been approved for non-compliance with some sections, so retailers need to sit up and take notice.
The regulatory requirements vary by state in the U.S. and all over the world, so cross-border retailers have a good amount of work to do here. Needless to say, this will require significant investment in technology.
U.S. Retailers To See International Competition
Some successful international retailers are getting ready to hit the U.S. market. The Irish low-price high-quality apparel and home goods retailer Primark is reportedly looking to open 10 U.S. locations this year. Germany’s Aldi and Lidl are targeting 2K stores each by 2018.
So given that backdrop, it’s become increasingly important for domestic retailers to take their current introspection a step further by getting as lean and efficient as possible and leveraging technology whenever possible.
Following are five companies that are already working to get there:
Wal-Mart Stores WMT
Wal-Mart isn’t new to ecommerce; the company has been building its capabilities over the past 4-5 years through over a dozen acquisitions and internal innovation. This year alone, it bought a 5% share in China’s JD.com in a deal that will help it reach Chinese customers. More recently, it spent $3.3 billion to acquire Jet.com, a company better known for providing the lowest rate available, that too in a market where Amazon operates. Jet’s attraction was its pricing mechanism that helped customers create smart baskets, with optimal order size, delivery speed and distance to minimize cost. This is technology Wal-Mart will be incorporating in its own business. The company has also started collaborating with technology players. Grocery is a focus area for the company and it now has an alliance with Uber to home deliver groceries in some markets.
On the other hand, it still has a huge footprint of 4.6K stores strategically located to address 90% of the U.S. population. This is amazing reach that only an online retailer can probably hope for. Since the company has been investing in technology for quite some time, many bits are already in place.
Wal-Mart in one of the first companies to offer the order-online-pickup-at-store facility. It also has the technology to detect when a customer has come for pickup so packaging is started even before she enters the store. This reduces delivery time to about 3.5 minutes, lower than the company’s promised five minutes.
Inventory management continues to improve. In the words of CEO Doug McMillan, "A dynamic connected supply-chain with improved forecasting leveraging predictive analytics can serve customers and reduce cost by merging truckload, pallet, case and each movement. Accurate inventory placement is a really good way to make money."
Its global technology platform Pangaea comprises smart pricing algorithms that help it manage pricing on large amounts of inventory. This in turn makes it easier to compete with online players. If a competitor has a lower price on any product, Savings Catcher in the Wal-Mart app fetches the customer a gift card for the difference.
But the company also has plans of shedding its low-cost image. This is in line with MasterCard data that shows customers looking for a balance between value and price. The desire to strike a balance is in fact what gets them to research products more. So companies need to understand that higher prices aren’t such a bad thing but need to be supported with relevant information.
The company also has the data now to show that omnichannel shoppers spend an average $2.5K a year compared to $1.4K for in-store-only buyers, so its ecommerce strategies seem to be working. Moreover, it is one of the few retailers seeing its store traffic move up rather than sideways or down.
To compete with Amazon better, Wal-Mart also has the regular 2-day shopping program and its own payment system called Wal-Mart Pay.
And this isn’t all because in January this year, the company open-sourced OneOps, an open source cloud and application lifecycle management platform allowing developers to use off-the-shelf technologies from Microsoft Azure, Rackspace, AWS and CenturyLink Cloud, as well as any OpenStack cloud in public and private cloud environments to speed up app-building and maintenance. The company has used the technology in house to move applications among multiple clouds and speed up the deployment of product enhancements across locations.
WAL-MART STORES Price
Target Corporation TGT
Target has had out-of-stock issues in 2015 and is hastening to correct the situation by cutting product lines, improving logistics, investing in supply chain efficiency and inventory management. The company is spending on these efforts. In 2015, it spent $1.9 billion. This year will be about even with the amount jumping up to $2.5 billion a year thenceforward.
Rather than buying its way into ecommerce, the company intends to use at least part of the allotted cash to form a tech-focused group, which is being called Goldfish, with around 20 engineers being employed to kick off the effort.
In Jun 2016, Business Insider found that 31% of U.S. consumers surveyed (38% in urban areas, 30% suburban and 25% in rural areas due to varying technology availability) had shopped for groceries online. Moreover, 10% of them said that the habit had partially or completely replaced their store visits. The main thing in the way of adoption is consumers’ preference to check out their own fresh produce and this is where the order online and pick up at store concept is helping to change shopping habits.
Some other important stats were quoted on refrigeratedfrozenfood.com as follows: “Online grocery sales are predicted to increase 21.1% annually through 2018, according to research from BI Intelligence, a research service from Business Insider, New York, compared to 3.1% for physical supermarkets. In 2015, UK-based Kantar Retail found shoppers spent between 3-4% of their grocery budgets online—up from just 1% three years ago.”
Target has gone a step ahead to encourage people to buy groceries online (currently an $18 billion+ business for the company). It has thrown in certain household, health and beauty, pet and baby products such as diapers and formula that customers can order in addition to groceries. Its delivery partner for the service is Instacart.
The company is also a big user of technology to boost in-store experience. It has deployed beacons across a large number of stores to personalize offers while the customer is inside the store. It is also building radio frequency identification (RFID) tags into apparel to facilitate inventory tracking.
TARGET CORP Price
Home Depot HD
Home Depot is another retailer that picked up online shopping trends early and took measures to leverage its existing stores for order fulfillment. The strategy, which it calls Interconnected Retail is doing extremely well with company officials saying, "As evidence of the success of our interconnected strategy, approximately 42% of our online orders are now leveraging our store footprint for fulfillment and nearly 90% of our online product returns are processed through the convenience of our stores".
The company doesn’t mention exact ecommerce spend, but it has a capex target of $1.6 billion this year. Last year, it built out a massive two million sq foot facility in Ohio (in addition to the 1.1 million sq ft and 900K sq foot facilities in Georgia and California, respectively). These facilities are intended to facilitate 2-day delivery of online-only orders.
Its Sync (acronym for Supply Chain Synchronization) project was fully deployed this year across 12 of its 18 regional distribution centers after a year of pilot use. Management says this is resulting in lower transportation costs and easier fulfillment. Dynamic ETA is another supply chain feature that helps it estimate delivery dates for online orders more accurately.
Around 50% of its digital traffic comes from smartphones and tablets, highlighting the importance of an engaging, interconnected experience. Mobile app enhancements like larger and clearer product images, live mobile chat and a simplified checkout experience are contributing to higher traffic and double-digit online sales quarter upon quarter.
Other initiatives include the customer order management (COM) system and buy online deliver from store (BODFS), both of which will roll out by year-end.
HOME DEPOT Price
The 2014 acquisition of Harris Teeter greatly helped Kroger jump start its omnichannel efforts. Harris Teeter’s online ordering system Express Lane was used to set up Kroger’s own order-online-pickup-at-store tool called ClickList and today both Express Lane and ClickList brands are used across different markets. Customers can drive up to pickup windows and drive off with their package with minimal waiting time. The acquisition also added 200+ stores, further expanding Kroger’s reach.
Perhaps to fend off competition from Lidl, the company has stepped up capex for building new stores and modernizing existing ones. The stores will be equipped to offer its ClickList service not only in Cincinnati where Lidl is building its presence but also in other markets across the country.
In-store enhancementswere started much earlier. As early as in 2012, Kroger launched its QueVision technology platform that uses sensors and predictive analytics to determine customer traffic in the store and when long lines are likely. Managers armed with this data are able to arrange for more cashiers to avoid the rush. The system reportedly helped reduce waiting time from four minutes to less than thirty seconds.
The company also continues to invest in its mobile app to create a seamless experience for customers. As a result, millions of its customers now have digital accounts and a growing number are using its digital tools.
KROGER CO Price
Whole Foods Market WFM
Whole Foods is a high-end grocery chain, which means it needs to convince customers that the high prices are justified. This can only be achieved with much more product information, which in turn can be achieved through a centralized data collection and analytics system. It also needs to convince them that an out-of-stock item is worth waiting for. Here again product information is of utmost importance.
But because the company has grown through acquisitions and has maintained a regional focus, it reportedly has 12 different ERP systems across its several hundred stores. Product data like nutrition information and quality standards is also lying in different locations, making supply chain and inventory management extremely difficult.
The company has therefore gone to Infor (third largest ERP vendor behind only Oracle and SAP) to build out a suitable cloud-based platform.
Competition and changing demand patterns pushed the company to start its new lower-priced 365 stores, but these may just be the perfect place to test the new platform, which is being built from the ground up.
Other than inventory and supply chain, the new system is expected to help the company consolidate product information, not only about things like quantity and weight but also other details such as whether it was responsibly grown.
The company will do away with the four POS systems it currently uses and will henceforth use only OnePOS, thus bringing together disparate data sets and using the information in its digital sales channels and linking it to rewards programs.
Other in-store efforts include greater use of scanners and beacons, new displays, new NFC-enabled terminals and Apply Pay, all with a view to pushing more value to customers, while freeing up staff to personalize the shopping experience. Because the best way to sell premium items is by paying attention to the buyer.
On the delivery front, Whole Foods made an investment in Instacart this year but the size of investment or any other details aren’t public. The companies have partnered since 2014 in a number of markets and the investment could mean closer integration of services.
WHOLE FOODS MKT Price
The MasterCard report on omnichannel shoppers is a clear indication that stores remain extremely important to most customers. It isn’t just the price and product that counts, but also the personalization and social element of shopping in stores that just isn’t available online. The truth is, shopping online can be a bit of a chore, but shopping in the store other than for essentials is also entertainment.
Moreover, the amount of choice available online can at times be confusing, so it’s comforting to be able to simply go where you’ve always gone. After all, you can always pull out your phone and compare prices.
Another thing to keep in mind is the merging of online and offline operations such that the two complement and leverage each other. This is a trend that is likely to continue for years to come. The companies that can best utilize the resources at their disposal and increase the efficiency in their operations will be winners.
All the discussed retailers except Wal-Mart are currently ranked #3 (Hold). Wal-Mart has a Zacks Rank #4 (Sell). But for people with a shorter investment horizon, there are plenty more options. So check out the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
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