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Holiday Fervor, Long-Term Trends Show Opportune Retail Sector

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The story narrating the retail sector’s transformation is now old. What is coming up is the holiday shopping season, the key yearly event for retailers. This money-making period brings with it a lot of enthusiasm as Christmas and Thanksgiving provide ample opportunities for retailers to make up for lost profits during the year.

The holiday season, which accounts for a sizable chunk of yearly revenues and profits for retailers, generally extends from Thanksgiving to Christmas, also including the Black Friday and Cyber Monday events. This season can represent as much as 30% of annual sales for some retailers. Last year, holiday season accounted for nearly 20% of overall retail industry sales.

Coming to the forecasts for this year’s holiday season, analysts remain optimistic on grounds of gradual wage growth, lower inflation, 16-year low unemployment rate, an uptick in the U.S. consumer sentiment to a 13-year high and a lift in economic activity post-hurricanes. Characterized by the aforementioned improvement in the consumer backdrop, alongside early-hour store openings, huge discounts, promotional strategies, price matching and free shipping on online purchases, the holiday season this November and December is likely to be a huge success.

The nation's largest retail trade group, National Retail Federation (“NRF”) rightly projects retail sales for November and December (excluding autos, gas and restaurant sales) to improve 3.6-4% to $678.75-$682 billion, up from $655.8 billion (or 3.6% growth) last year and better than the five-year average sales growth of 3.5%. Additionally, the NRF projects online holiday sales to rise 7-10% to nearly $117 billion in November and December compared with a 9% improvement to $105 billion in 2015.

Apart from the strong consumer confidence, the NRF predicts sales for the period to benefit from a longer holiday season as Christmas is falling on Monday this year and 32 days after Thanksgiving. This will give retailers one extra day of sales than normal, as well as benefit last-minute shoppers in the weekend before Christmas.

Moreover, Deloitte projects holiday season sales to go up as much as 4.5%, while e-commerce sales are envisioned to improve 18-21%. The data compiled by Kantar suggests that the fourth-quarter holiday period sales are expected to jump 3.7%. Further, eMarketer forecasts holiday sales (November and December) to increase 3.1% to $923.15 billion, while retail e-commerce holiday season sales are anticipated to rise 16.6%.

Further, with considerable growth in retail employment in recent months, the NRF expects to witness lesser seasonal hiring for this year’s holiday bash. It expects retailers to employ nearly 500,000-550,000 seasonal workers this year, a decline from last year’s 575,000 hiring.

In this context, retailers including Macy’s, Inc. (M - Free Report) , J. C. Penney Company, Inc. (JCP - Free Report) , Target Corporation (TGT - Free Report) and The Gap, Inc. (GPS - Free Report) have already put forward their hiring plans for the upcoming holiday season to cater to the holiday rush. Per media reports, Target intends to employ 100,000 associates, while Macy's will hire nearly 80,000 seasonal workers. Meanwhile, Gap is deploying seasonal associates at all stores including Gap, Gap Outlet, Banana Republic, Banana Republic Factory and Old Navy across the United States and Canada. J. C. Penney will hire nearly 40,000 seasonal workers.

This apart, there are some trends that are likely to rule the retail space in the long term. Let’s take a glance.

Long-Term Trends 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:

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. 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 - Free Report) , Ross Stores Inc. (ROST - Free Report) , Nordstrom’s (JWN - Free Report) Nordstrom Rack, Five Below Inc. (FIVE - Free Report) , 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 becoming increasingly tech savvy, brick and mortar stores need to leave their old-fashioned layouts 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, which enable customers to 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 and Best Buy Co. Inc. BBY 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. 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 Corp. (RL - Free Report) , V.F. Corp. (VFC - Free Report) and Tiffany & Co. (TIF - Free Report) .

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 the 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 it 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 - Free Report) .

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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