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Retail Transition Brings Opportunities for Industry Players

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The transformation in the retail sector has brought in good news with signs of prosperity emerging since late 2017. The overwhelming holiday season was a clear indicator, which not only justified the growth of the economy but also lifted the outlook of the retail sector. The economy has been gaining from more confident consumers, who are willing to spend, as the labor market remains strong and incomes continue to rise.

This favorable consumer environment raised the hopes of retailers, who are looking to benefit from collaborations, taking more risks and being innovative. Clearly, retailers coming up with new ideas to create a more customer-centric experience are poised to grow in today’s market.

The retail trends emerging after the solid holiday bash reveal that consumers will continue to spend throughout 2018. This calls for another eventful year ahead, where consumers will seek more convenience, personalization and speed, and retailers will continue to bring in newer ways to provide a robust customer experience.

The Nation Retail Federation (“NRF”) revealed that retail sales for January were as strong as the holiday season backed by an improving economy. Retail sales in January rose 5.4% year over year, following a 5.1% unadjusted year-over-year growth in holiday sales during November and December.

With consumers feeling good about their financial health and consumer spending reflecting steady growth, the NRF predicts retail sales for 2018 to improve between 3.8% and 4.4% from the 2017 level. Notably, retail sales were up 3.9% in 2017 compared with 2016. Further, online and other non-store sales are likely to witness growth of 10-12% as the definition of retailing continues to evolve.

That said, let’s take a look at the trends that are expected to rule the retail sector in 2018.

Retail Trends This Year

The retail sector will witness intense competition among store formats, channels and players. Consumers will gain from a slate of increasing options as retailers continue to reform their businesses with both online and in-store operations.

Redefining Retail Strategies: Despite the rise of omni-channel and e-commerce, the brick-and-mortar retailing concept still holds value. Time and again it has been proven that it is impossible to eliminate physical stores and human assistance in shopping. However, with the rise of digital commerce there arises a need to re-think and re-define the role of workforce to deliver on both online and in-store tasks.

Retailers thus need to focus on a renewed retail strategy, including adjusting the ways of doing business. For this, companies have to consider adopting methods to analyze consumer behavior, ensure value proposition and redesign operating models.

Online Retailers Focus on Offline Store Formats: Amid news of big brands resorting to enhancing digital presence, 2017 also saw some leading online pure plays launching offline or physical stores. These offline stores basically serve as a marketing tool to boost online business. Some e-tailers that launched physical stores include Amazon (AMZN - Free Report) , Birchbox, Bonobos, Everlane, Rent the Runway and Warby Parker.

On the other side, brick-and-mortar stores are continuously making efforts to improve online and omni-channel presence in order to keep up with evolving shopping habits. This is working well for retailers as customers prefer to shop directly from the brand’s e-commerce site.

Some notable names that have boosted their online presence are Macy’s Inc. (M - Free Report) , V.F. Corp. (VFC - Free Report) , American Eagle Outfitters Inc. (AEO - Free Report) , Target Corp. (TGT - Free Report) and The Gap Inc. (GPS - Free Report) , among others. This trend of online retailers opening physical stores and brick-and-mortar retailers making collaborations and acquisitions to expand online is going to prove beneficial for the industry in 2018.

Increased M&A Activity: The last year was marked by numerous mergers and acquisitions (M&A) as well as investments to stay ahead. Some of the most interesting M&A activities included Amazon acquiring Whole Foods, and Wal-Mart (WMT - Free Report) buying numerous e-commerce brands.

Further, we saw Target investing in direct-to-consumer mattress brand, Casper. These mergers and investments have been beneficial in bringing more business for these brands. At the same time, this has helped retailers bring innovative solutions to drive traffic, boosting the top and the bottom lines.

Further, we expect to see many more M&A activities in 2018. In fact, grocer Albertsons Companies proposal to buy the distressed drugstore retailer, Rite Aid Corporation (RAD - Free Report) , may soon materialize.

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 Targetand Best Buy Co. Inc. (BBY - Free Report) focusing on smaller store formats.

The main reason for this shift in consumer preference is the convenience and accessibility that smaller stores provide. Consumers are looking to make quick purchases these days. Finding the desired products by wandering through endless aisles at big stores is time taking.Today, smaller stores with specialized selections are preferred as finding desired products in little time is easier. Additionally, smaller stores are cost effective right from setting up 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 demand 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 Inc. (JWN - Free Report) , Aeropostale and Target. Moreover, retailers are increasingly seeking the assistance of third parties to quickly get their products delivered.

Economic Outlook Looks Supportive: The economic outlook has been favorable lately due to increased consumer confidence, steady consumer spending, low unemployment rates and rising incomes. These factors alongside rising house prices and improving stock market have put enough money in the hands of consumers, increasing their propensity to spend.

This is a welcome thing for retailers, as the prosperity of the retail sector depends largely on consumers’ spending power. With these favorable trends expected to continue in 2018, retailers are gearing up to compete and gain a larger share of consumer spending.

As you can see, there are plenty of reasons to be optimistic about the retail industry in 2018 and beyond. 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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