Low Price is the only Winner in US Retail
Where are all the shoppers going? Low-price retailers
It might seem like the most basic retail maxim, but the second-quarter drilled it home for investors: low prices matter. The only winners in an otherwise bleak retail landscape were the ones offering the lowest ones.
The list of companies that posted sales growth in the quarter, including Wal-Mart Stores Target, TJX , Ross Stores , and of course Amazon.com , share one major characteristic: low prices. Even Gap GPS got a boost from 5 % same-store sales growth at its inexpensive Old Navy brand. The trend is grim for brands that have commanded premiums and traditional retailers, especially because they all need to be investing in e-commerce just to keep up.
Executives from Wal-Mart and Target said consumers responded to “investments in price,” meaning both were willing to sacrifice profits for top-line growth. TJX and Ross, meanwhile, have a business model that allows them to sell items at a discount while also maintaining healthy margins because of their low operating costs. Ross said its operating margin climbed to 14.9 % versus 14.4 % a year earlier thanks to better prices on merchandise and stronger-than-expected sales.
At Gap, Chief Executive Art Peck called Old Navy “the fastest-growing apparel brand in the U.S. among major retailers.” He said “frugal innovation”—improving product quality at accessible price points—was essential to its success.
The success of the low-price strategy bodes poorly for other retailers, particularly those that have traditionally sold the same or similar products as the discounters but for more money.
For the retailers where sales declined— Macy’s , Kohl’s and J.C. Penney among them—the quarter shows that anything short of changing their business model might not be enough.
Nowhere was this clearer than in sporting goods, where shares of Dick’s Sporting Goods and Foot Locker were slammed. Dick’s blamed lower-priced competition while Foot Locker blamed the absence of exciting new styles for its 6 % decline in same-store sales. Investors, who knocked down Foot Locker shares more than 25 %, seem to be more concerned with a June deal where Nike agreed to sell some products on Amazon.
For retailers, the only path to sales growth appears to be through lower prices. That creates a painful choice between growth and profits and will force retailers to reduce their cost structure, even as they try to build up e-commerce. The only retailers worth buying these days are those that can earn more while charging less.