Retail in Transformation Mode: Will Players Benefit?

The retail sector is on transformation mode, with store-based retailers now ditching their longstanding business approach for the young and attractive omni-channel concept that promises to provide a seamless shopping experience, both online and in-stores. So, when it comes to shopping, customers are now spoiled with choices.

Consumers can make purchases through a computer, smartphones, tablets, or in person. At the same time, retailers may save on some cost of serving by encouraging consumers to pick up bulky items from a store instead of shipping it to their home. This way, it works well for both.

In general, retail is a seasonal business with nearly 20% of sales in the U.S. generated during the holiday season in December. Further, being a consumer-centric business, the state of the economy plays a major role in the ascertaining the health of this sector.

With respect to seasonal shopping periods, it is that time of the year when retailers are getting ready for a major spending event: Back-to-School and Back-to-College. This is a crucial time for retailers as American households stock up on school and college supplies.

The key categories of sales during this season are apparel & accessories, books & music, computers & consumer electronics, office equipment & supplies, toys & hobbies and sporting goods, to name a few. Some close contenders for the Back-to-School market are Wal-Mart Stores Inc. (WMT), Best Buy Co. Inc. (BBY), Inc. (AMZN), Office Depot Inc. (ODP), Staples Inc. (SPLS) and J.C. Penney Company Inc. (JCP).

National Retail Federation (NRF), the nation's largest retail trade group, projects retail industry sales for 2017 to grow in the range of 3.7% to 4.2% over 2016. Further, online and other non-store sales are expected to register 8% to 12% growth.

Long-Term Trends that Rule the Sector

With the increasing influence of technology on the buying patterns of consumers, the general retail sector trends set to rule the future are below:

Omni-channel Eliminates Retail Pure-Plays: Omni-channel, which emerged as an option to offer more touch points and multiple channels to customers, has gone beyond this simple definition. The cross-channel sales mantra now requires every retailer, whether online or brick and mortar, to bring together both physical and digital systems to serve omni-customers.

As a result, retail pure-plays, both online and offline, are now turning omni-channel. This means online retailers are coming up with physical stores or pop-up shops to satisfy customers and vice versa.

Here, the prime objective is to bridge the gap between a physical and an ecommerce store of any particular retailer. For example, Macy's Inc. (M) makes the most of its omni-channel presence with services like click-and-collect.

Additionally, the company's site allows customers to access the inventory at its local stores, so that they can check the availability of a product at the nearest store, purchase it and have it picked up or arrange for same-day delivery. In another online feature, Macy's mobile app allows customers to scan bar codes of products at stores and check online reviews, promotions and the like.

Growth of Off-price Retailing: A recent trend shows that apart from e-commerce, the rise of off-price retailing is making competition worse for retailers. Off-price retailers like TJX Companies Inc. (TJX), Ross Stores Inc. (ROST), Nordstrom Inc. (JWN) Nordstrom Rack, Five Below Inc. (FIVE), Macy's Backstage, Bloomingdale's, Kohl's and others are doing a good job, unlike department stores and specialty clothing retailers.

Customers today are looking for value, which means reasonable and quality merchandise. Off-price retailers offer immense value as they purchase their inventory at a discount.

In contrast, department and specialty retailers have to resort to mark downs from time to time in order to clear their inventory. This has led to a major shift in consumer preferences to off-priced merchandise, making department and specialty store irrelevant to consumers.

Expanded Payments Options: With retail undergoing a sea change, the modes of payment have also evolved dramatically. The increasing use of mobile payments and the EMV mandate in the U.S. induced retailers to remodel their payment terminals to accept multiple options like mobile payments and EMV cards.

Some of the available payment solutions are PayPal Here Chip Card reader, Mercury and Poynt, which equip retailers with different payment accepting options. These devices or hardware ensure compatibility with iOS and Android devices, magnetic cards, EMV, QR codes and NFC payments such as Apple Pay, Android Pay and Samsung Pay.

Technology-Friendly Brick & Mortar Stores: With shoppers increasingly becoming tech savvy, brick and mortar stores need to leave their old-fashioned layout behind and improvise by adopting innovative in-store technologies. With rising demand for convenient delivery and alternative payment solutions, all at affordable prices, technology is bound to play a key role in growth. This is because consumers are becoming increasingly dependent on their mobile phones and other digital devices to buy goods.

The simplest way to execute this is through in-store mobile devices, through which customers can make payments, see product demonstrations, gather information and connect to social networks. Further, these in-store devices can help customers locate the products they are looking for. Not only this, retailers have developed mobile apps that will track customers as they shop and send them tailored offers on products in sections they are in, recommend items based on past purchases, or allow them to program automated shopping lists.

In-store technologies, that customers look for these days include mobile point of sales, price checkers, self-checkout payment lanes, information kiosks, and digital signage among others. Other innovative technologies to engage customers both in store and elsewhere are smart shelves, Wi-Fi hot spots, point-of-sales (POS) systems, virtual storefronts and endless aisles.

Shrinking Store Sizes: Changing consumer preferences have led to an increase in smaller stores. Even 'big box' retailers are now concentrating on smaller store formats, which accommodate more specific merchandise according to consumer preferences. We have already seen a transition relating to this idea, with companies like Target Corp. (TGT) and Best Buy focusing on smaller store formats.

The main reason for this shift in consumer preference is the convenience and accessibility that small stores provide. Consumers are looking to make quick purchases these days. Finding the desired products by wandering through endless aisles of big stores seems cumbersome and time taking. Today, smaller stores with specialized selections are preferred as finding desired products in little time is easier in these. Additionally, smaller stores are cost effective right from inception to managing operating costs to finding space in urban environments.

Growth of Retail-centric Apps and Services, Social Shopping: As already said, consumers are looking for speedy deliveries apart from multiple buying options. This has increased the number of retail-centric apps that merchants are adopting in order to stay competitive. Further, retailers are looking for third-party solutions to fulfill the demands of customers. Retailers have also been using social media platforms to advertise their brands, launch products and campaigns, talk to customers and even make merchandising decisions.

Most companies are now also selling their products through social networking sites like Facebook, Instagram and Twitter, which have shopping functionalities. Some retailers that have already adopted the Like2Buy platform on Instagram are Nordstrom, Aeropostale and Target. Moreover, retailers are increasingly seeking the assistance of third parties to quickly get their products delivered.

Merging Online and Offline Data to Track Shoppers: The growing use of multiple shopping channels has made it imperative for retailers to collectively study their online and offline data in order to analyze the buying habits of consumers. This gives a more comprehensive picture of their shopping practice.

A study of online and offline data has revealed that shoppers usually browse for products online before finally making purchases in stores. Such data can be helpful in tracking the purchase habits of customers and executing effectively on their omni-channel initiatives.

Taking Charge of Value Chain: The success mantra in modern retail is to provide a compelling shopping experience, which is only possible by taking full control of one's value chain i.e., from the creation of products to their consumption. Some of the retailers that have proven themselves in this area are Apple, Ralph Lauren Corp. (RL) and Trader Joe's. We expect this strategy to gain importance, with retailers focusing more on fulfillment practices, product distribution, speed and convenience of delivering products to consumers, and more.

Growth of Retail in Emerging Markets: Having tapped most of the potential in the domestic market, retailers have started venturing into emerging markets. Most retail chains are witnessing growing demand for their products in countries like Brazil, the Middle East, China and India. Retailers planning to venture into these markets include the likes of The Gap Inc., The Clorox Company (CLX), Ralph Lauren, V.F. Corp. (VFC) and Tiffany & Co. (TIF).

Consolidation in Retail Industry: The U.S. retail industry has been witnessing further consolidation, with companies merging with peers to become larger and vying to lead the markets they serve. Some of the recent mergers include that of Dollar Tree Inc. (DLTR) with Family Dollar, which has given rise to a mega U.S. discount retailer. Also, apparel retailer, Ascena Retail Group Inc. (ASNA) bought Ann Taylor parent ANN Inc., which has strengthened the position of the former in the women's apparel market.

Also, the recent liquidation of sporting goods chains like Sports Authority, Sport Chalet and Golfsmith has left gaps to intensify competition. Such consolidation in the sporting goods space is benefiting other participants like DICK'S Sporting Goods Inc. (DKS) and Big 5 Sporting Goods Inc. (BGFV).

Localization of Products Mix: Localization requires tailoring of products and stores to satisfy the needs of native communities. This trait is expected to prove most beneficial this year as customization is likely to attract more customers. One example of such a retailer that tailors its merchandise for respective stores is O'Reilly Automotive Inc. (ORLY).

Bottom Line

As for the general trend, omni-channel will rule retail business. The focus of retailers will be to stick to this growing business model for exemplary customer experience.

As you can see, there are plenty of reasons to be optimistic about the retail industry over the long term. But what about investing in the space right now?

Check out our latest Retail Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report

V.F. Corporation (VFC): Free Stock Analysis Report

TJX Companies, Inc. (The) (TJX): Free Stock Analysis Report

Tiffany & Co. (TIF): Free Stock Analysis Report

Target Corporation (TGT): Free Stock Analysis Report

Staples, Inc. (SPLS): Free Stock Analysis Report

Ross Stores, Inc. (ROST): Free Stock Analysis Report

Ralph Lauren Corporation (RL): Free Stock Analysis Report

O'Reilly Automotive, Inc. (ORLY): Free Stock Analysis Report

Office Depot, Inc. (ODP): Free Stock Analysis Report

Macy's Inc (M): Free Stock Analysis Report

Nordstrom, Inc. (JWN): Free Stock Analysis Report

J.C. Penney Company, Inc. Holding Company (JCP): Free Stock Analysis Report

Five Below, Inc. (FIVE): Free Stock Analysis Report

Dollar Tree, Inc. (DLTR): Free Stock Analysis Report

Dick's Sporting Goods Inc (DKS): Free Stock Analysis Report

Clorox Company (The) (CLX): Free Stock Analysis Report

Big 5 Sporting Goods Corporation (BGFV): Free Stock Analysis Report

Best Buy Co., Inc. (BBY): Free Stock Analysis Report

Ascena Retail Group, Inc. (ASNA): Free Stock Analysis Report, Inc. (AMZN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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