Pick your worry. After all, there are plenty.
This story first appeared in the February 15, 2017 issue of WWD. Subscribe Today.
From too many stores and too little political certainty to warp-speed corporate evolution and the consumer’s ability to spend, the landscape is more than shifting. Retail is in midst of an evolutionary upheaval that’s more dramatic and far reaching than perhaps anything the modern industry has ever seen.
And the pace is only accelerating, leaving chief executive officers panting for breath and struggling to hold on to their jobs as they hope their strategies lead their companies through the chaos and to a better place — although no one’s quite sure just what that retail paradise might look like.
To gauge just where the pressure is greatest, WWD checked in with 10 experts and had them rate the industry’s risk in four key areas, with a rating of one indicating little to no worry and 10 signaling immediate, catastrophic danger.
The averages of their rankings showed that the biggest danger sits right at the heart of the business: retail’s brick-and-mortar legacy.
Risk Factor: 6.5
Retailers trying to find their way in a digital world are still seen by many as too grounded in bricks-and-mortar.
Even though government statistics show 91.6 percent of retail sales are rung up in physical stores, it is the digital side, with 8.4 percent market share, that’s grabbing much of the overall sales gains.
“The incumbents who have a huge footprint of real estate are going to have to figure out how to optimize that real estate profile,” said Mortimer Singer, ceo of Marvin Traub Associates.
“Everyone is going to be tightening up their belts on real estate,” Singer said. “It will be a massive flight to quality, so if you own good real estate — the best malls, ‘the super zips,’ as they’re called, or the best cities — people are going to pay up for that because of the omnichannel opportunity” to make use of both clicks-and-bricks.
It’s a dynamic that has many stores struggling to justify their existence, although some are starting to sense a change in the tide.
Consultant Jonathan Low, partner at Predictiv, said two years ago he would have said brick-and-mortar concentration was an extreme risk to retailers. Today, he’s more sanguine, taking notice of changes at the online leader.
“Amazon may never be able to be a wholly online enterprise and ever be profitable,” Low said, referring to the company’s e-commerce business. “Now they’re doing Amazon Go, they’re opening their book stores, they’re getting into fashion.”
Besides exceptions, such as the struggling Sears Holdings Corp. and secondary malls, Low predicted, “Brick-and-mortar is going to have its day again.”
Risk Factor: 6.2
Retailers are — or should be — on the move, making all manner of changes in their businesses to keep up with consumers and competitors alike.
But reworking to square off with Amazon, get supply chains on the fast-fashion schedule and catch the Millennial customer, who’s less interested in buying “stuff” and more interested in creating memories, makes for a lot of moving parts.
“The greatest risk for retailers is their ability to adapt to an omnichannel business model,” said David Silverman, a debt analyst at Fitch Ratings.
While the online business is more expensive, given shipping costs and returns, it’s an important complement to physical stores.
“Those that are able to accomplish it well, while some sacrifice to operating margin is expected, can continue to perform relatively well and thrive,” Silverman said. “Those that are unable to make these significant changes to their business model, their operating models probably are the most risky.”
The rub is that not every change is the right one.
Antony Karabus, ceo of HRC Retail Advisory, said, “The restructuring risk is that very few retailers have taken the bottom up and holistic look at their organization, the processes and the overall in infrastructure.”
Karabus argued that many retailers have spent significantly on infrastructure to build an e-commerce business to only cannibalize their store business and make less money doing it.
But he also noted, “You’re lucky enough if you cannibalized yourself as opposed to Amazon cannibalizing you.”
Change is unavoidable, though, and Shyam Gidumal, principal and Northeast consumer products and retail market segment leader at EY, likened restructuring risk to “the risk of taking Lipitor if you already have heart disease.”
Risk Factor: 5.1
President Trump is something of the X factor in retail risk.
But change from the Disrupter in Chief — whether it be a border tax, a trade war with China or the fallout of an early-morning tweet — is such an asymmetrical risk that some discount it as entirely uncontrollable while others see imminent danger. Many assume that any policy shifts will impact retailers more or less evenly.
Orders that pass through the Oval Office could also spur economic activity, such as tax cuts on corporations and big-time infrastructure spending on roads and bridges or a wall between the U.S. and Mexico (whatever the other impacts of such a move might be).
“I don’t think Trump-related uncertainty right now is causing people to clamp down and not spend,” said David Bassuk, managing director at AlixPartners. “Political uncertainty creates anxiety, but many of the things Trump is doing has a greater likelihood of putting money into people’s pockets then taking money out of people’s pockets.”
EY’s Gidumal said: “Uncertainty is unfortunate and you do have a risk of recession and all that stuff depending on how this stuff works itself out. But I’m a firm believer that you only worry about things you can control.”
Risk Factor: 3.3
Of all the things retailers have to fret over, the consumer’s actual ability to spend is not one of them.
While there are plenty of people who have been left behind by globalization and technological change — as the tumultuous election bore out — the consumer overall is in pretty good shape.
The unemployment rate stands at just 4.8 percent with household incomes are on the rise.
People have money to spend — total retail and food service sales rose 3.3 percent last year — but they’re not focusing on fashion as they once did. Sales at apparel and accessories specialty store sales gained just 0.8 percent last year and department stores excluding leased departments fell 5.6 percent, while restaurants and bars saw a 6 percent sales gain and auto and other motor vehicle dealers were up 4.1 percent.
“Consumers are spending money, they’re just spending money differently,” said AlixPartners’ Bassuk. “They’re spending money online, they have many new avenues for shopping and for getting value.”
Greg Portell, lead partner for A.T. Kearney’s consumer products retail practice in the Americas, said companies often present themselves as the victim.
“When you hear about poor sales performance, you’ll hear people blame the fickle consumer or the Millennial or some…element that will make it hard to sell product,” Portell said. “It’s the merchant’s or a merchandiser’s job to figure that out.”
He said companies have to be agile enough to respond to the environment and get the sales.
In an uncertain world, he pointed to at least one aspect of the retail landscape that’s for sure: “You’ll see much more heightened focus on the consumer experience. These retailers are now brands that are drawing people into their stores. They’re not a utility that’s meeting a core need. They’re competing on experience.”