What is wrong with retailing

What is wrong with retailing

If there was any doubt as to why Wal-Mart Stores Inc. just inked the largest ever purchase of a U.S. e-commerce start-up, look no further than the details in this week’s retail-sales report.

Consumers aren’t afraid to spend these days, but they are also becoming more discerning about what, where and how they make their purchases. They are buying more services and experiences as opposed to goods and clothing. And they are more likely to do so at Amazon.com Inc. and other online retailers than in traditional brick-and-mortar shops.

While this isn’t a new development, the disparity between non-store sales and those at stores has reached nearly unprecedented levels, a trend that is likely to be a saving grace for Friday’s retail-sales data. Economists polled by The Wall Street Journal estimated sales rose a healthy 0.5 % overall in July, which would mark the fourth consecutive monthly gain.

Sales at non-store retailers—including Jet.com Inc., which Wal-Mart agreed to acquire for USD 3.3 billion, and Amazon—rose 10.6 % in the first half of 2016 versus a year earlier. That included a 14 % surge in June compared with a year before, the biggest monthly increase in 10 years.

Meanwhile, department-store sales fell about 4 % through the first six months of the year, their poorest showing since the financial crisis. The disparity between store and non-store sales was the greatest in 16 years, according to the Commerce Department.

Click vs. brick

Propensity to shop clearly is not the issue. Consumer spending rose at a 4.2 % rate in the second quarter, the best since late 2014. The personal-saving rate was 5.3 % in June, matching the lowest since December 2013. And a recent survey by United Parcel Service Inc. found that for the first time, consumers said they made more purchases online than in stores.

Like Wal-Mart, other companies are trying to adapt to this new world. Macy’s Inc. said Thursday it would close an additional 100 stores and focus more on e-commerce. Coach Inc. and Michael Kors Holdings Inc. are reducing how much they sell to department stores. Kohl’s Corp. plans to test smaller-format stores.

These are not your grandfather’s retail sales.

The specific problem of Macy’s Department Stores

Macy’s may not have found the solution for the woes of U.S. department stores, but it has moved beyond the hand-wringing phase into action. The reasons are similar to what has been explained before.

The company said Thursday that it is closing about 100 stores, or 15 % of its base, with most expected to close early next year and the remainder as leases expire. It is also “examining opportunities” for four downtown flagship stores across the country and is in negotiations over the sale of its men’s store on San Francisco’s Union Square.

The moves represent a dramatic shift for the retailer, which has for years been weighing potential strategies for monetizing its real estate. They are an important defensive step as it tries to prevent itself from being further squeezed between Amazon.com and discounters such as TJX Cos. Shares rose 18 % on August 11 afternoon. They remain down by 40 % over the past year.

The urgency of the situation has become increasingly clear for Macy’s as same-store sales have fallen for six consecutive quarters. Second-quarter results reported Thursday beat analysts’ expectations, but same-store sales fell by 2.6 %.

Shut the front dor

In addition to tougher competition from Amazon’s push into clothing, Macy’s and other department stores have effectively been competing against themselves as they expand online. Furthermore, variable shipping costs associated with online sales mean they tend to come with lower margins than in-store sales. The only way to combat the rise of e-commerce is to close physical locations, thereby eliminating costs and freeing up capital.

Macy’s said Thursday that it plans to invest in improving its in-store shopping experience by adding vendors and new technology and better training staff. It also said it will continue to invest in its e-commerce platform.

Of course, closing stores means ceding market share, which some retailers have been reluctant to do. The news pushed up shares of competitors J.C. Penney, Nordstrom and others. But Macy’s said the reduction in earnings before interest, taxes, depreciation and amortization will be offset by cost savings beyond those associated with store closings.

Macy’s still needs to prove it can effectively target the right stores for closure. It said some of the locations slated to be shuttered sit on real estate worth more than the store itself. Still, moving forward is better than standing still.

Back in May when Macy’s reported its worst quarterly sales since the recession, Chief Financial Officer Karen Hoguet said management was “scratching our heads” about why consumers weren’t spending. Macy’s big moves on August 11, 2016 show it does not plan to wait around to find out.

Why luxury groups should not rule out store closures

Discounting department stores in the U.S, nervous travellers in Europe, changing tastes in China: This year has thrown up plenty of challenges for luxury brands. But one that has garnered less attention may yet turn into their biggest headache: e-commerce

More high-end scarves and handbags are sold online than might be expected considering their expense, the prevalence of fakes and the vast sums their designers have put into flagship stores. Bain & Co. estimates that 7 % of total luxury sales are already made through the internet, and this share is rising as e-commerce outpaces other channels. The consultancy expects the sector to grow 2 % to 3 % a year over the next half decade; within this, online sales should rise 15 % a year.

Figures published last week by Yoox Net-a-Porter, an online luxury specialist formed by the 2015 merger of Milan-listed Yoox and London-based Net-a-Porter, lend weight to such forecasts. In the second quarter, the company’s sales rose 17 % at constant currencies. At 21.7 %, growth was fastest at Yoox, which sells branded goods from past seasons at a discount. But even the full-price Net-a-Porter business expanded by 14.5 %.


The growth of e-commerce, both through companies’ own sites and third-party platforms such as Yoox NAP, complicates the already challenging task of making recent store investments pay.

With growth through store expansion a thing of the past, Burberry has pinned its recovery hopes on a plan to boost the performance of its existing retail space. Management said in May it expected productivity improvements in stores to account for half of top-line growth over the next three years while e-commerce will account for another third. French luxury group Kering has laid out similar ambitions for its Gucci brand, which has failed to grow as fast as peers in recent years.

They will be swimming against the current. Bain expects single-brand stores, which currently account for 29 % of industry sales, to dwindle in importance with subpar growth of 1 % a year over the coming half-decade. That looks particularly meager when set against warnings of rising property costs made by Burberry and others.

So far, the only brand to have announced store closures is Ralph Lauren. Stefan Larsson, the 41-year-old Swede hired by the eponymous founder last year to rejuvenate the aging brand, plans to shutter about one-tenth of the outlets. Other companies have stopped or abruptly slowed their store-opening programs, but often point out that even outlets in Hong Kong—the market most affected by the current luxury downturn—remain profitable, partly thanks to turnover-linked rents.

Growth from China and the travel industry should eventually rebound, though not to the levels seen in the 2010-2014 boom. But the decline of bricks-and-mortar retail looks like a more entrenched trend that shows every sign of spreading from the U.S. and Europe to the crucial luxury markets of the Far East. The industry may yet be forced to follow Ralph Lauren’s lead.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.