Retailers to See a ‘Pay Off or Die Off’ in 2018

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Last year, retailers sprang into action. Tanking foot traffic and consumers’ undeniable shift toward e-commerce propelled them forward and forced them to experiment. They set about realigning their store fleets, rejiggering assortments and reacquainting themselves with today’s shopper.

“This was the year the blinders came off for a sector that had gone relatively unchanged for decades,” said Anya Cohen, a retail analyst at IBIS World.

And what they saw was an urgent need for change.

The result of the near-frantic energy that followed was a lot—a lot of acquisitions, a lot of collaborations, a lot of new concepts and a lot of restructuring. It gave us: Stores without product. Stores as fulfillment centers—for their own chains as well as other retailers. Stores offloading square footage to the most unlikely takers. Stores on inventory diets. Stores re-engineering their supply chains. And stores springing up under online pure-play banners.

More questions than answers

“2017 was the year of the freak out,” said Melina Cordero, head of retail research in the Americas for real estate services firm CBRE. “There was a lot of fear in 2017. Is retail dead? Is e-commerce going to take over? What’s the future holding?”

According to Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, last year was “chaos.” And though he’s excited about the direction the economy is headed—employment’s up, businesses are investing—he doesn’t think this year will be much better in some ways. “There’s going to be another gigantic wave of store closures,” he said. “We’re insanely overstored and all the growth is online.”

Davidowitz said we haven’t even scratched the surface in terms of rightsizing the retail square footage problem.

Though unpopular, his outlook echoes predictions from Cushman & Wakefield, which anticipates up to 11,000 store closures this year, a number that eclipses last year’s “apocalypse” by 30 percent.

That total also factors in potential bankruptcies from stores that struggled throughout 2017 like J. Crew, Neiman Marcus and The Bon-Ton Stores.

Cohen said she anticipates some doors closing, starting with those that were announced last year. Beyond those, she feels many of the shuttered doors will come from retailers who hesitated in 2017.

“If they didn’t make the strategic defensive store closures over the last year, store closures in 2018 will likely be more defensive and less controlled,” Cohen said. Similarly, she said any bankruptcies coming our way this year will result from retail executives who either stuck their heads in the sand or did too little too late.

From Cordero’s point of view, 2017 was the nadir for a lot of things, including bankruptcies and closures for one main reason: “The e-commerce growth and the requirement and burden on brick and mortar brands [to adapt to it] was huge in terms of costs and not all retailers were prepared to adapt to that so in the last 18 months those that couldn’t afford or get on board with the transition dropped off,” she said.

The calm after the storm

That so many retailers braved the challenge last year and therefore are now past this critical stage is one reason Cordero anticipates this year will bring some calm and a bit of optimism. “2018 is ‘Ok, this isn’t going to be as bad as the worst headlines suggested. Let’s rethink, re-strategize and spend a little money,’” she said.

One avenue forward is through mergers and acquisitions. Some companies discovered this path last year, and Cordero said more will explore it going forward because change is costly. It takes investment to remodel a store, institute the infrastructure for in-store pickup or develop analytics to help you learn your customer better.

“If you think about repurposing a mall or re-tenanting a mall takes a lot of money to buy out leases to physically alter the structure, it takes a lot of money,” she said. “A lot of these brands have a lot of promise and a lot of potential but if they don’t have the capital, and mergers and acquisitions are a way to access that capital.”

M&A is also an avenue for putting R&D into hyper drive.

As illustrated by some deals we saw in 2017 like Walmart acquiring Bonobos or Amazon picking up Whole Foods, these transactions allow companies to reach beyond their comfort zones.

“This is a pretty unprecedented time in retail sector. I think we’ll see more M&A and collaboration activity among retailers that you wouldn’t necessarily pair together,” Cohen said. “Retailers can benefit a lot from acquiring another company both from learning more about how successful companies operate and also being able to expand their client base.”

The early results

Ultimately, no matter what analysts say, how the year unfolds will be—as it always is—based on how the strategies from the last 365 days played out.

“This will be the year that retailers that have put in the legwork to adapt will either see the fruits of their labor or realize what they did wasn’t enough,” Cohen said.

And we started to see the dividends during November and December when spending topped expectations, Cohen said. Not discounting the effect of the strong consumer confidence, she said the 4.9% growth in holiday spending was a reflection on retailers’ efforts throughout last year.

“To have year-on-year gains in holiday spending for these brick and mortar retailers that show really low spending last year compared to historical averages, there is something to be said for the implementation of a new strategy and the success of that strategy,” Cohen stated. “2018 will be the year of pay off or die off.”

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