WHERE HAVE ALL THE SHOPPERS GONE?

WHERE HAVE ALL THE SHOPPERS GONE? Fortune Magazine September 22, 2014

WHERE HAVE ALL THE SHOPPERS GONE? • Retailers big and Small Continue to Disappoint Wall Street • What’s Wrong and How Can They Fix It? • “Things are Damn Slow” Retailers tell Robin Lewis of the TheRobin Report (retail industry expert)

WHERE HAVE ALL THE SHOPPERS GONE? • Kohl’s and Coach have experienced several quarters of disappointing sales • Wal-Mart ($279 billion in US sales) has had seven quarters of declining store traffic • Once strong brands like Staples and Abercrombie and Fritch have shuttered stores • Apple, the king of square foot sales has seen a decline in same-store sales this year

WHERE HAVE ALL THE SHOPPERS GONE? • Retail sales has only grown 3.7% in 2014, an anemic rate 5 years past the depth of the Great Recession • “The Retail business is in a funk” according to Kip Tindell, CEO/Founder of Container Stores • Why the “malaise”, retail experts point to 3 reasons: • Addiction to promotions and discounts • Continued economic instability • Too much store space for the current population

WHERE HAVE ALL THE SHOPPERS GONE? • In spite of all the bad news there are some winners in retail, • On-line powers like Amazon continue to siphon off market share • Brick & Mortar stores like Dollar General and TJ Maxx are also prospering

Reason #1 • Problem: Death by Discount • Offering customers prices below retail to spur their primal desire to get a bargain • Discounting has become a trap that retailers are in and customers expect • Overall price “deflation” means you have to sell more to break even • This has been further escalated by consumers ability to “showroom”

Reason #1 • Problem: Death by Discount • The beneficiaries of these developments are off-price retailers selling designer goods at lower prices than department stores • TJX through it’s TJ Maxx and Marshalls stores will likely surpass Macy’s this year in revenue • TJX has 2,000 stores today compared with 1,680 five years ago

Reason #1 • Problem: Death by Discount • Department store chains are responding, Saks 5th Avenue had 53 stores 5 years ago, today 39 • But its “Off 5th” stores have grown from 55 to 79 in the same period • Nordstrom long known for its high end quality expects to have twice as many “Nordstrom Rack” stores as it full service department stores in 2016

Reason #1 • 15% of Regional Malls are expected to close or convert to other uses in the next the next decade • Since 2007 Outlet Shopping Centers have grown from 311 to 340

Reason #1 • Solution: End the Race to the Bottom • The way out has been elusive • Ron Johnson, JCP, 72% of products sold were sold at 50% off or more • His attempt at EDLP resulted in a loss of $4.3 billion in sales in 2013 • Then Macy’s and Kohl’s responded with even more promotion but this year are reporting a decline in sales • Johnson’s solution may have been wrong but not his analysis

Reason #2 • Problem: Too Much Space • The end of the “Supercenter” who could imagine, for 3 decades a “no-fail” concept • Wal-Mart rode the “Supercenter” to Fortune 500’s #1 company, Target and Best Buy followed • But that may all be coming to an end, reason, too much space. 52.4 sq.ft./capita in the US vs. 16.4 in Germany • Given the ease of buying anything from a stapler to toilet on line, continually growing footprints are leading to empty parking lots • The US Retail principle of “more and bigger” may be over

Reason #2 • Solution: Shrink to Grow • Home Depot CEO, Frank Blake, put the brakes on HD growth in 2008, most analysts and employees thought he was nuts • Instead invested capital in improving existing stores and growing its on-line presence • In Blake’s 7 years as CEO Home Depot has become the U.S. number 2 retailer and stock has doubled (he steps down November 1)

Reason #2 • Solution: Shrink to Grow • Gap has returned to same-stores sale growth after closing dozens of stores • Growth in stores at the U.S. top 100 retailers has slowed to 3%/year from more than 12% three years ago according to Moody’s.

Reason #3 • Problem: The Non-recovery Recovery • Lower income customers are still price sensitive, the lower 20% of Americans saw the real income grow only 19.5% between 1967 and 2012 • The upper 5% income grew 88% • The way people use disposable income also changed, smart phones can account for $100/month in service plans, apps and music • Many customers have less to spend on a new pair of shoes

Reason #3 • Problem: The Non-recovery Recovery • This economic stagnation has impacted stores like Target that posted negative comparable sales in 2013 and is further down in the first 2 quarters of 2014 • Not only are there too many stores, they tend to be located at farther drives from home – thus they are impacted by high gas prices and cuts in food stamps

Reason #3 • Solution: Assume this is “the New Normal” • Dollar General has experienced a boom in the past five years growing by 2,500 stores to 11,388, and same-store sales continue to rise • Their stores are “hyper Local” with fixed, low prices and they are in communities as small as 20,000 people, many within walking distance • Many retailers wasted time waiting for customer to return

Reason #3 • Solution: Assume this is “the New Normal” • Wal-Mart is trying to counteract the success of Dollar General and other dollar-store chains by rolling out its own small-format stores located in densely populated locations. • It plans to have 700 by February 2015 up from 400 at the beginning of this year. • In this era of vacillating consumer confidence, retailers either have to win clearly on price and convenience or wow customers with such innovative products or unique buying experiences to get customers to open their wallets

Reason #4 • Problem: Stunted Evolution • One trend is clear, on-line sales will continue to grow for the foreseeable future. • E-commerce sales should leap 61.8% by 2018 to $491.5 billion • Brick and Mortar sales, a vastly larger number at $4.43 trillion will grow a modest 12.8% to $5trillion

Reason #4 • Problem: Stunted Evolution • Every retailer participates in on-line sales but not all do it well. • The digital experience is changing customer shopping habits in other ways too. • Customers research products on-line and then go straight for the item without browsing. • This reduces spontaneous purchases.

Reason #4 • Solution: Blend the Old with the New • Malls are especially vulnerable to the ease of on-line shopping, 15% of items stocked in malls are now routinely purchased on-line. • Some mall operators have grasped this trend and are investing their “A” malls adding new features such as gyms and wine bars…”you cannot have a salad and a glass of wine on line” • To compete with on-line mall operators and retailers have to enhance the excitement of the shopping experience.

Reason #4 • Solution: Blend the Old with the New • Some retailers are using the very assets that naysayers make them irrelevant, their stores. • Wal-Mart's on-line business is growing at a faster rate than Amazon, they allow customers to order things on-line and then pick them up at one of their 3,000 stores nationwide. • Macy’s is using its 810 stores to help fill e-commerce orders more quickly

Reason #4 • Solution: Blend the Old with the New • Getting better at this “Omni-channel” approach is essential for any retailer planning to succeed with physical stores • “People have not stopped wanting things. The economy will eventually repair itself. But where will the customers buy. That is the question.” Mark Cohen, Retail Studies, Columbia University

WHERE HAVE ALL THE SHOPPERS GONE?