View the 2018 Hot 100 Retailers here.
Hot retailers come in all sizes and formats, as witnessed by STORES Magazine’s 2018 Hot 100 Retailers report. Nine of the 10 top businesses represent different retail segments, indicating that growth owes more to management and strategy than any kind of tide lifting boats in any particular category.
With head offices in Dublin, Ireland, and a U.S. office in Cordova, Tenn., No. 1 Primark represents a growing trend of offshore retailers making a major impact with U.S. consumers. The U.K. parent of No. 3 Build.com uses the name Ferguson in the United States and Wolseley elsewhere; No. 10 Pet Retail Brands has its international headquarters in Markham, Ont., Canada.
Economic and shopper dynamics contribute to the diversity among the ranks of the hottest retailers, suggests Sara Al-Tukhaim, a senior vice president of Kantar Consulting. “All of these retailers fill very targeted needs,” she says, reflecting the current environment.
“Shoppers are feeling good about the economy. Job rates are at an all-time high. ‘Haves’ are expecting tax cuts to boost income growth,” Al-Tukhaim says. “All of this is translating to spending including home buying, and more discretionary spending such as home improvement projects, experiences, beauty and the like.”
Engaging the customer
Primark opened its first U.S. store in 2015 in Boston; it’s since opened seven other locations in and around New England, with more planned next year in New Jersey and Florida. In July, Primark opened a 58,000-square-foot facility in Brooklyn — more than 40 percent larger than the typical Primark store — with 56 fitting rooms and 42 checkout lanes.
Its merchandise offerings, which include more than a dozen house brands, range from clothing, footwear and accessories to housewares, beauty products and confectionary. Though it operates a website where shoppers can see merchandise and prices, Primark prefers to keep its on-trend, low-priced goods selling at high volume in bricks-and-mortar environments.
“The cost to support home delivery can’t be supported with our price points,” says John Bason, chief financial officer of Associated British Foods, Primark’s London-based parent. “Volumes don’t go up by a bit — they go up by a lot.”
Bass Pro Shops has been growing steadily for several years as outdoor pursuits such as hiking, camping and fishing have been rising, says David Marcotte, senior vice president at Kantar Consulting. “Each has a very widespread set of requirements for participation, from $20 shoes to $20,000 boats,” Marcotte says. “Given this, retailers have a great amount of space to create value for nearly all shopper segments.”
Bass Pro has made regular appearances in the Hot 100, but none as high as this year’s No. 2 ranking after completing a prolonged acquisition of Cabela’s last September. In May, Bass announced an expanded alliance with Sunglass Hut to open shops inside 160 Bass Pro Shops and Cabela’s locations. The partnership dates to 2015, when Bass recycled the Pyramid in Memphis from a sports arena and entertainment venue into a 535,000-square-foot retail space that included a Sunglass Hut inside the Bass Pro Shop.
Sitting on the third rung of the Hot 100 list is Build.com. The company, founded 18 years ago by students at Chico State University in California, has launched In-Home Preview, an app that lets customers view select merchandise in their own homes. Shoppers can turn faucets on and off, adjusting water flow and changing spray patterns; they can also adjust lighting fixtures to various heights and angles.
“Customers have always told us how important it is to touch and feel products before making a purchase. Now we have a way to bridge that physical world with the digital,” says Dan Davis, chief technology officer at Build.com.
“We’ve seen AR-enabled product sales double since launching In-Home Preview. We are seeing the confidence to convert to a sale is being impacted. To us, that’s a huge leading signal. It’s telling us customers are engaged with that specific feature and are spending an extra amount of time in the app.”
The housing market is an important contributor to retailers’ growth, Al-Tukhaim says. “Build.com and Wayfair are absolutely benefiting from the boost in home buying and shoppers’ ability to afford home improvement projects, both professional and more do-it-yourself.”
Amazon.com, which picked up another $9 billion in sales last year with its acquisition of Whole Foods Market, has been working hard to fully integrate Whole Foods. Its brands are featured on the Amazon website and Amazon Prime subscribers receive discounts while shopping in Whole Foods stores.
Amazon “continues to do a great job tailoring and personalizing its assortment to shoppers,” Al-Tukhaim says, “and is creating its own niches on its site that demonstrate it can go deep as an expert as well as broad.”
Amazon also is expanding its bricks-and-mortar ventures. With the Seattle pilot project an apparent success, cashier-less Amazon Go convenience stores are planned for San Francisco and Chicago. Amazon is also growing its chain of bookstores with three on the drawing board for this year, making nearly 20 locations for a format launched just two years ago.
“At its core, Amazon is customer-obsessed, putting its customers first in all decisions and then working backward. This mentality, combined with its relentless focus on innovation and invention, puts the retailer in the unique position of being able to disrupt entire industries practically overnight,” says Meaghan Werle, a senior analyst for Kantar.
“On the fulfillment side, Amazon is innovating on immediacy, reducing fulfillment times from two days to two minutes with the introduction of Instant Pickup,” she says. “With Prime Now as the chosen platform for Whole Foods delivery, it is clear that the retailer views on-demand fulfillment as the way forward for online grocery. In turn, Amazon is elevating shoppers’ expectations for competitive retailers as they benchmark them against the stress-free and convenient shopping experience that Amazon provides.”
Building on capabilities
Macroeconomic factors such as a strong home building market and low interest rates combined with demographic factors like the increasing number of new, young households “are the major drivers behind shoppers’ desires and ability to invest in their homes,” says Laura Kennedy, a vice president at Kantar Consulting. “This strength in the market is intensifying competition for ‘share of home’ beyond the traditional recipients, as shoppers demand more convenient experiences — the latter particularly giving a boost to the potential of retailers like the online-only Wayfair.”
No. 5 Wayfair has been a pioneer in combining ecommerce and technology, including augmented reality, virtual reality and 3D. Its Shop the Look feature includes Room Ideas, interactive views of various rooms in the home: Shoppers can click on anything in the picture and get more information on the item. The company says it is getting more than 130 million photo views a month via Room Ideas.
“As a mass market retailer with one of the largest online selections of furniture and décor in the world, we’re uniquely positioned to help bring the power of AR even further mainstream as we rapidly grow our 3D model library and build upon our existing capabilities,” says Mike Festa, director of Wayfair Next.
No. 6 Tapestry was something of a Wall Street darling after handbag retailer Coach acquired Kate Spade in May of last year and changed its corporate name to Tapestry. The company’s stock tumbled in the first half of this year, and analysts are picking apart the performance of its three brands, which also include footwear maker Stuart Weitzman.
Anna Andreeva, analyst with Oppenheimer & Co., says the brand has been too promotional of late, driving margins down. In addition, top corporate management “underestimated the need for new leadership/product newness/supply chain efficiency” at Stuart Weitzman, Andreeva writes in a research note, adding “slower sell-through in carryover key styles (bulk of sales) and inefficiency in supply chain is shaving off $15-$20M in EBIT [earnings before interest and taxes] this year.”
She does suggest the sluggish performance is only temporary, noting that Tapestry now “controls two-thirds of [the] North American aspirational price point handbag space.”
PetSmart, at No. 7, also benefited from a major acquisition last year with the $3.35 billion takeover of Chewy.com. The purchase price was the highest ever paid for an online retailer, topping the $3.3 billion Walmart paid for Jet.com in 2016.
The deal looked good from a retail perspective, giving PetSmart a huge ecommerce presence, but added to PetSmart’s woes from a financial standpoint: The Chewy.com acquisition lifted PetSmart’s debt obligations to more than $8 billion, coming on top of the $3 billion leveraged buyout orchestrated by BC Partners in 2015.
The only other pet retailer among the Hot 100 Retailers is No. 10 Pet Retail Brands, which was formed two years ago with the merger of Pet Valu and Pet Supermarket. Most of the company’s stores are of the small, neighborhood variety.
Competing on value
No. 8 Five Below, the brainchild of Zany Brainy veterans David Schlessinger and Tom Vellios, opened its first stores in California last year and this year is breaking ground in the new territories of Arizona, New Mexico, Nevada, Utah, Colorado and Arkansas. Five Below expects to open about 125 new units before the year is out.
In format and price points, Five Below competes with dollar stores and close-out merchants, but its merchandise mix is not comparable to any of those rivals. Five Below wares — and prices — are aimed squarely at teens and tweens who want something to do outside of school and homework.
“People know they can get anything in the store for $5,” says Joel Anderson, Five Below’s chief executive. “We are a trend-right retailer, but trends don’t define us.”
Dollar stores have the reputation of being “Amazon-proof” because they cater to low-income shoppers who prefer the convenience of doing business in their neighborhoods. A Morgan Stanley study published last year confirmed this reputation: When surveyors asked Morgan Stanley clients, “Which consumer sectors do you think will take the longest for Amazon to materially incrementally disrupt?” 45 percent responded dollar stores.
That helps explain the growth spurts among small format value retailers that placed five among the Hot 100: Five Below is joined by No. 15 Ollie’s Bargain Outlet, No. 48 99 Cents Only Stores, No. 58 Dollar Tree and No. 63 Dollar General.
At No. 9, Ulta is the highest ranked of the three retailers specializing in health and beauty care products on the Hot 100 Retailers list, the others being No. 56 Sephora and No. 87 Sally Beauty. Ulta, which has been opening about 100 locations annually in recent years, opened its first store in Manhattan on the Upper East Side in November.
“It’s a very competitive landscape and we are hyper-aware of what our competitive set is doing,” says Monica Arnaudo, senior vice president of merchandising at Ulta.
“In mass cosmetics, it’s been really interesting to watch, because you can see that what was transpiring on the prestige side has started to happen on the mass side,” she says. “The industry is moving very fast because the customer is moving very fast. And young, emerging brands, no matter the price point, can achieve an unbelievable level of desirability based on digital influence alone.”
Though drug store cooperatives are among the Hot 100 Retailers, chain drug stores are conspicuous by their absence. “There’s no doubt that the drug store concept certainly is changing,” says Kate Senzamici, principal analyst at Kantar Consulting. “CVS and Walgreens both have been struggling with foot traffic.”
Also, “Both retailers have been experimenting with new initiatives aimed at ramping up fulfillment and delivering on the ‘last mile’ in order to provide more holistic shopping options. Curbside pickup and same-day or two-day prescription delivery both factor into this.”
Looking down the road, “We expect drug retailers to aggressively assert their value propositions as trusted health care providers, with an emphasis on lowering costs, expanding access and increasing volume in the Medicare Part D market,” Senzamici says.
David P. Schulz has been writing for STORES since 1982 and is the author of several non-fiction books.
View the 2018 Hot 100 Retailers here.