Will 2016 Be A Transformative Year For Retail?
While the dust hasn’t yet settled for 2015 retail sales, it seems clear that a significant consumer transformation is taking place. On-line sales, which still amount to less than 10% of total retail sales, show no signs of slowing. And, category by category, the impact of the shift toward on-line sales is being felt in a significant way at physical retail stores. Traffic was down and even retailers who were reasonably well positioned on-line did not seem able to fully make up for lost brick and mortar sales. Black Friday, as one example, which was once a watershed event to kick off the Holiday season is quickly losing steam as consumers opt for the easier option of shopping on-line. The NRF reported that, for the first time, more shoppers went on-line than showed up in stores during the critical Black Friday weekend. Undoubtedly that trend will continue and retailers must act with urgency to respond as they are still not getting their fair share of overall sales.
I believe there are three main reasons for this:
- Amazon remains an on-line juggernaut. They accounted for over 51% of all web sales over Black Friday and they continue to grow share of US e-commerce sales. A recent report suggests that they captured 26% of all on-line sales up from 22% a year ago. With Amazon Prime continuing to gain customers and the company continuing to investment spend in distribution centers, free shipping and the promise of same day and one hour delivery, most traditional retailers simply aren’t able to keep pace.
- The promise of omni-channel isn’t really being fulfilled. While many retailers have been talking up their “omni” game, the actual execution is generally disappointing. If retailers won’t be able to get their direct on-line fair share, leveraging brick and mortar stores is their best option. However, the actual execution of buy on-line, pick up in-store leaves much to be desired at most retailers (even the market leaders) and this year’s sales results also show that retailers still have a way to go to correctly balance in-store and on-line inventory needs.
- There are too many stores that are too big. I expect to continue to see store closures and downsizings as retailers learn to right size the portfolio. I suspect that fewer retailers will have ambitious growth programs as the ROI for new stores continues to look less promising.
In the world of retail food, which is my beat, I expect to see a progression of the major trends that have driven the industry the past several years:
- Formats will continue to become more specialized. Expect continued growth from hard discounters like Aldi, which makes the leap to California this year, as well as the pending arrival of Lidl, the other hard discount European powerhouse. While supermarkets will continue to hold significant share, they face increasing competition from dollar stores, drug stores, clubs and the like.
- Consolidation will continue. Last year brought some significant bankruptcies (A&P and Haggen) as well as continued activity on the M&A front with Kroger’s purchase of Roundy’s and the mega merger of Delhaize and Ahold USA. These events will continue to reshape the landscape with fewer bigger players competing.
- Rationalized e-commerce is coming. Unlike general retail, with upwards of 10% of sales on-line, grocery is languishing around 1% as retailers still attempt to figure out how to cover the significant costs of delivering fresh products to consumers’ homes. While Instacart and others generated a lot of hype in the past year, the questionable economic model will likely need some revamping. The pricing model appears to be in flux and the minimum delivery fee has been raised to $5.99 to reflect more of the true costs. E-commerce will definitely find its role but it needs to be accompanies by a more rationalized cost model. That won’t stop Amazon and others from continuing to push the boundaries on what’s feasible.
What is clear is that this is shaping up to be a transformative year for retailers. I think there will be continued separation between the winners and losers as those who plan properly for the future stand the best chance to survive and thrive in a tough market.
Neil Stern for Forbes