Business Betting–‘Brick and Mortar’ Retail Death Watch 2017 Betting Odds
–The retail environment has changed dramatically with ‘brick and mortar’ retail less relevant.
– Many well established US retail brand names are ‘analog players in a digital world’.
– Corporate leadership with a sound plan to reinvent themselves for the new reality is the exception rather than the rule.
The Internet has changed everything. No secret there. It’s also no secret that it’s completely transformed a number of industries and left in its wake many ‘corporate casualties’ including Circuit City, Borders and Blockbuster Video. If anything, the pace of this economic transformation will accelerate in the coming years and even more ‘legacy retailers’ will go under. Even more will need to take drastic cost cutting steps to survive. In this article we’ve focused on ‘big box’ retail but in the future we’ll go inside the shopping mall and look at the retailers there.
‘BRICK AND MORTAR’ RETAIL DEATH WATCH PROPOSITION BET ODDS
Which of these retailers will be next to announce that they’re going out of business?:
KMart: -300
Sears: +100
Barnes & Noble: +250
Target: +1250
Office Depot: +1500
Staples: +2150
JC Penney: +2500
Best Buy: +7500
Which of these retailers will be next to announce that they’re closing 50 or more stores?:
KMart: -300
Sears: +100
Barnes & Noble: +250
Target: +1250
Office Depot: +1500
Staples: +2150
JC Penney: +2500
Best Buy: +7500
KMart: Everything you need to know about KMart can be summed up from these pitiful pictures of ‘Black Friday’. The amazing thing is that there’s still 801 KMart locations in existence. They’re currently owned by another retail dinosaur (Sears) but that has not helped either company. K-Mart hasn’t turned an operating profit since 2012 and the numbers have been downright brutal since then. It’s never a good sign when a manufacturer of popular toy lines won’t sell to you any more and now Jakks Pacific–the 5th largest US toy maker–has suspended sales to KMart. The only response so far has been to close stores and cut costs but that will work for only so long in a retail game that has passed KMart by. I was surprised to see a KMart still open in my mom’s hometown and I asked her if she ever went. Her response says it all: “I go there sometimes. It’s really nice because there’s never anyone else there”.
Sears: Sears owns KMart and isn’t in much better shape. They’ve tried to advance the narrative that KMart’s woeful performance is dragging down the company’s other brand. At one point, it looked like Sears might survive due to their household appliances which have always held a good reputation with consumers. Now those sales are also dropping quarter after quarter as their technology lags behind. Sears same store sales dropped 7% in the second quarter–their eighth consecutive quarterly loss. Ratings agency Fitch said recently that Sears has “significant default risk” within the next two years. Sears, like KMart, is an ‘analog era’ retailer that just doesn’t seem to have a place in an increasingly digital world. They could prolong the inevitable by closing KMart though that would do little to change their ultimate fate.
Barnes & Noble: For Barnes & Noble, it’s just a matter of time. As of May 2014, the bookseller operated 1,361 ‘brick and mortar’ retail outlets in the United States. The number is down to 640 today. The original explanation was that they were placing more of an emphasis on online sales. Not a bad plan in theory but that does put B&N in direct competition with a little outfit in Seattle called ‘Amazon’. Things aren’t going well there either–after a 22% year over year decline in Q2 of 2016 they managed to pare their losses in half to 12.5% in Q3. Then there’s the digital reader called ‘Nook’. Early in the game, Nook was holding it’s own with 21% of ebook sales (compared to 60% for Amazon). They’ve lost market share every quarter since and rumors have been rampant for the past year that the Nook might not be long for this world. The bookselling world has changed and people are actually reading more than ever. Unfortunately for Barnes & Noble, they don’t have a clue how to reach them. Hard to see how they ‘get back in the game’. ‘Brick and mortal’ book retailing is dead, Amazon’s Kindle (along with Apple and Android Tablets) dominate e-reader sales and they’ve got a long way to go before they become an online player. Amazon is testing drone delivery and buying their own airplanes to improve logistics, Barnes & Noble is still trying to get their website to work.
Target: Target’s stock price surged in late November even as same store sales experienced a -6.7% decline in the third quarter. That was explained away by the sell-off of their pharmacy business to CVS and for now Wall Street is buying it. Overall sales are down -6.3% year over year. Working in Target’s favor is a decent digital sales platform which has seen 20%+ sales growth quarter after quarter and a 26% gain in the third quarter. Revenue is down but profit is up 21% on improved digital sales, cost cutting, and reduced cost of merchandise at the wholesale level. It’s realistic to see a scenario in which Target closes even more stores to focus on their digital efforts.
Office Depot: Office Depot might have taken their big hit in August of 2016 when they announced they’d be closing 300 more stores on the heels of their seventh straight quarterly loss. That was in addition to 400 previously announced leaving the company with 1,800 locations. There was definitely a lot of ‘fat’ in the company’s retail presence with multiple stores in many areas that could have been effectively served by one. Were I asking the Magic 8 Ball about Office Depot’s future it would say ‘Reply Hazy-Ask Later’. On one hand, they’re up against Amazon and WalMart in many categories. On the other hand, they’re in a position to serve a growing ‘free agent’ worker class that needs much of what they’re selling. That fact alone gives them more viability going forward than many of the other stores on this list.
Staples: Staples is in a similar situation as Office Depot–a company that they tried unsuccessfully to merge with. Declining sales both domestically and internationally and an oversaturation of the marketplace with approximately 1,300 stores. Their future is also similar to their rival–in theory, they’ve got a lot to offer the growing non-traditional work force. Right now, however, there’s no obvious path back to relevance for Staples.
JC Penney: It wasn’t long ago that JC Penney had one foot in the grave. It has experienced a remarkable turnaround showing that ‘old school’ retail can still be done profitably–at least for the time being. JC Penney announced a 4.1% increase in sales in the fourth quarter and expects sales for the year to be up 3% and 4%. Nothing the company has done is revolutionary–emphasize their many popular ‘in house’ brands, beef up their e-commerce offerings and focusing on successful stores. Company CEO Marvin Ellison says that “We’re trying something different. We’re actually listening to the customers.” JC Penney is now adding appliances to their product mix based on customer demand and that could put the final nail in the coffin of one time rival Sears. Not sure what things will hold in the long term for JC Penney as the retail world becomes further digitized but for now things look good.
Best Buy: Best Buy was at one point following the same path as their now defunct rival Circuit City. In the four years since CEO Hubert Joly has been at the helm, however, their fortunes have turned around completely. The stock price is up over 300%, sales are up at both the online and retail level and most importantly they’re offering products that customers want to buy including Apple and Samsung. As the ‘brick and mortar’ retail market has changed around them they find themselves as the last big electronics retailer standing. Joly is one of the few retail CEOs that appears to know what he’s doing and based on what he’s done so far you probably won’t see Best Buy on the ‘Death Watch’ list next time out.