The industry’s evolution requires new measures of success

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A glance at headlines from the past couple of years could make anyone believe the retail industry is doomed. Major announcements of store closures, job losses, bankruptcies and household names going out of business aren’t exactly positive news.

The past year has been an eye-opening one, but industry watchers say the retail sector is quite healthy. New technologies, changing shopping patterns and an abundance of excess retail space mean that many of these developments are more a sign of evolution than of trouble. A series of sessions at NRF 2018: Retail’s Big Show will address the industry’s evolution.

It’s hard to ignore the disruptive impacts on individual stores, though it’s essential to also consider job and volume growth in ecommerce. As the industry moves further to an omnichannel environment where physical and digital channels coalesce, the old ways of measuring retail performance no longer apply.

A sign of change

The perception that the retail industry is in trouble is understandable. In the past year, major news organizations have run feature stories on the “retail apocalypse” and the “retail meltdown of 2017” that resulted from “sagging sales in the troubled sector.”

As retail is increasingly conducted through multiple physical and digital channels, store closures aren’t necessarily a sign of distress but a sign of change.

Photos and videos of stores holding liquidation sales fuel the inaccurate narrative. Large malls have been shuttered in a number of cities, and household names like Sears, JCPenney, Macy’s, Radio Shack and Kmart are together closing thousands of locations; in late October, the retail think tank Fung Global Retail & Technology says that announced closures since the start of 2017 could be the most on record in a single year.

But what looks like doom on the surface is simply part of the industry’s evolution, experts say. Excess retail space built out during the past couple of decades, changing consumer trends and the rise of omnichannel have significantly changed the ways in which retail is transacted.

If it’s hard to see that retail is doing well, it’s because the industry looks quite different than it did a decade ago.
“There are people saying the retail industry is dead,” says Mark Cohen, director of retail studies at Columbia Business School. “The retail industry is just fine. The economy is, from many vantage points, completely healthy. What is happening is that the players in the marketplace are in disruption.”

Mark Mathews, vice president of research development and strategy at the National Retail Federation, says disruption is changing retail so rapidly that it’s hard to measure the sector in the same ways as in the past. As retail is increasingly conducted through multiple physical and digital channels, store closures aren’t necessarily a sign of distress but a sign of change.

“Nobody is quite sure how to measure the industry,” Mathews says. “But all those old metrics and measurements that made sense 10 or 15 years ago no longer make sense.”

Misinterpreted data

Store closings are not abnormal; IHL data shows 14,000 new-store openings in the past year, compared with 10,000 store closures — that’s a net of 4,000 new stores opened in 2017. The categories with the most openings were convenience stores, mass merchandisers, fast-food establishments and supermarkets. Specialty soft goods and department stores saw the most closures.

Meanwhile, CNNMoney.com claimed in May that “department stores have lost more jobs than coalmines,” and CNBC.com proclaimed the more than 11,000 job losses in April 2017 a “bloodbath in retail.” While Bureau of Labor Statistics data indicates that retail is down over the past six months, it is still well above its prerecession figures, Mathews says. The biggest issue is that the way jobs are calculated doesn’t reflect the shifts happening in the retail sector.

The Census Bureau uses the North American Industry Classification System, which only counts employees who work in stores as “retail.” Retail company employees who work in retail warehouses, distribution centers, call centers, regional centers and headquarters are often classified in other sectors.

“You have all these retail companies that are investing in ecommerce that are logistically restructured,” Mathews says. “They’re building warehouses, hiring drivers, and none of that is being counted as retail employees or represented in the data. What you are seeing being counted is mostly just store employees.”

The Wall Street Journal reported in April that retailers and logistics companies have been opening warehouses at a record pace and staffing them with “armies” of pickers to process orders. According to BLS data, the warehouse and storage sector in March 2017 was up 5 percent from the previous year.

Amazon now employs more than 90,000 full-time workers in its fulfillment network and announced plans to hire an additional 25,000 part-time workers over the next year.

“The job losses add to the narrative that retail is in trouble,” Mathews says, “but you have to consider the way jobs are measured. Many of these jobs are moving [to other areas].”

Shifts in spending

While experts debate its meaning, there’s little doubt that retail is changing in profound ways. Over the past decade, consumers have shifted more of their shopping online for convenience or cost savings. Online sales still constitute less than 10 percent of all retail sales, according to the Census Bureau, but while retail is growing at a rate of 4 percent, ecommerce is growing at a rate of 16 percent.

Cohen says the narrative is partly rooted in the fact that changes are happening so quickly; the rapid transition to the digital marketplace and the fact that stores were “overbuilt” at unsustainable levels led to the need to start culling some locations. A 2016 report by Green Street Advisors says that department stores would have to close even more locations to reach the levels of productivity they experienced in the past.

Most of the 250 “AAA” malls are doing well, Cohen says. It’s mostly excess retail space and poorly performing malls and stores that failed to evolve that are closing.

Mathews says many of the major store closings aren’t necessarily representative of the entire retail sector. Much of the bricks-and-mortar retail business is comprised of smaller retailers with fewer than 100 employees, and even at national mass-merchandise retail chains, things are “incredibly positive.”

“If you look at things locally, it’s not sound,” Mathews says. “But if you look at overall retail on a national level, the big picture is looking positive.”

Greg Maloney, chief executive of the Americas Retail division at JLL, says ecommerce has “woken up the sleeping dog.” Retailers have typically operated in the same fashion for decades, having to do little more than open their doors, advertise their products and build new locations. Some were slow to react and waited until they started to feel the pain, at which point it was simply too late.

“I think that’s why you’ve seen some of the [retailers]either file for bankruptcy or close stores in the past few years,” Maloney says. “It happened so quickly — they got so beyond trying to compete effectively in the marketplace — it was just easier to shut down.”

Failure to evolve

Retailers typically close thousands of stores every year, rebalancing their portfolios by closing underperforming stores while opening new locations. A growing trend since the Great Recession is to cut losses by closing poorly performing stores more quickly rather than letting them linger for years. What has captured the nation’s attention more recently are closures of high-profile brands.

Yet some of these closings aren’t necessarily due to a lack of consumer spending or competition from the web but because of a company’s failure to evolve. Jeff Roster, vice president of retail strategy for the IHL Group, says many of these stores are “out of touch” with merchandise selection, aren’t capitalizing on younger generations and don’t engage consumers in their preferred shopping habits.

Radio Shack and Payless Shoe Source, which represent 1,700 of the announced store closings in 2017, have barely changed stores or business models since the 1980s, according to Roster. And he says Sears, which has announced 300 closures of Sears and Kmart locations, hasn’t been able to engage modern, technology-driven consumers.

Meanwhile, specialty retailers have been siphoning off some segments of business with better offerings and a superior, updated digital experience. Department-store product categories such as cosmetics have been nearly “devastated” by specialty retailers like Ulta and Sephora, Roster says.

“That’s about $8 billion [in annual revenue]that used to sit in department stores,” he says. “The challenge is how do they remain relevant when the market begins to specialize?”

Blurring the channels

The common narrative in many of the news stories is that bricks-and-mortar closings are being driven by cutthroat competition from Amazon. Roster says “virtually every retailer” is now competing with Amazon, but it’s difficult to justify saying it’s killing off bricks-and-mortar when e-tailers are establishing physical footprints and the top 10 ecommerce players are traditional retailers that sell online as well as in stores.

“The idea that ecommerce is killing bricks-and-mortar is a fallacy,” Roster says. “What is killing bricks-and-mortar is [retailers]that don’t understand ecommerce or invest in the concept or technology.”

Bricks-and-mortar retailers are expanding their digital channels, while online retailers are starting to dabble in physical spaces. Roster says Amazon’s acquisition of Whole Foods Market will make it a “radically different” store within a few years; while it still will focus on the core Whole Foods customer, it also will grow into an Amazon “dropbox” and be used as way to “get as close to the customer as possible.”

Closing stores can be part of a strategy to optimize omnichannel growth. IHL noted that even “healthy” retailers may close 1 percent to 3 percent of their underperforming stores each year. While ecommerce is pressuring some stores, it’s also offering new opportunities for others.

Roster says cloud computing, Software-as-a-Service solutions and other technologies are leveling the playing field, giving small retailers the same access to the market as the leading players. There’s an “opportunity like we’ve never seen before in history,” he says, for small retailers that learn to optimize both their physical and digital channels.

Robert Gregory, global research director at PlanetRetail RNG, says that while physical stores “aren’t dead,” they are being pressured to reinvent themselves to align with modern shoppers.

Some of the traditional roles of a physical store — learning about products, price shopping and fulfillment — are now being handled by online channels.

Many consumers now use stores for “touch and feel” or experiences but do much of their research and price-comparison shopping online. It’s not out of the question that some retailers could close even more stores in the coming years.

“I think over the next 10 years, stores will really need to be reinvented much more closely to the expectations of the modern shopper,” Gregory says.

The store of the future

Over the coming years, Maloney believes retail increasingly will be driven by customer experience and technology. More “commodity-type products” will be fulfilled via home-delivery and click-and-collect models; bricks-and-mortar stores will need to refine their relevance with experiences that consumers can’t find in the digital world.

While this disruption is not affecting the industry at the top level, Cohen says it is affecting retail at the store level. He says certain subsectors of the retail industry will continue to face great challenges and disruption in the coming years as they aim to refine their store experiences while facing growing online competition. Now that consumers can shop anywhere from the comfort of their homes, every retailer is in competition with the world.

“Twenty years ago, the marketplace was in charge,” Cohen says. “Today, the consumer is completely in charge.”

A number of characteristics are required for a successful reinvention, according to PlanetRetail RNG’s 2017 “Store of the Future” report. Stores will have to move away from the traditional roles of offering product range, price and proximity to more experiential roles that can’t be replicated by a low-cost online player. Creating a frictionless experience also will be essential, and Gregory says stores will need to optimize things like click-and-collect, in-store digital engagement and rapid fulfillment.

The Internet is not going to wipe out bricks-and-mortar, Cohen says, but it will continually take away market share in some categories. Online players will experiment in the physical world, though he sees few opening stores en masse as the country’s excess retail square footage continues to decline.

“There will be Internet players that choose to go physical, with good reason,” he says, “but they’re not going to open up 800 stores.”

Many believe the next level of disruption could come from augmented reality. Cohen says it won’t be very long before consumers have greater access to more headsets and virtual-reality platforms, further bringing some traditional in-store experiences to digital. That will only blur the channel lines further, he says, as consumers will be able to “walk the store” and “experience” products from their own home.

“The ‘store’ will soon be in their home,” Cohen says. “They’ll walk a virtual store, reach for a product … pick it up and take a look. The technology is already here. It just hasn’t become ubiquitous, but it will.”

Craig Guillot is based in New Orleans and writes about retail, real estate, business and personal finance. Read more of his work at www.craigdguillot.com.

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