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Industry Outlook

The retail landscape has been undergoing a fundamental change in recent years, with technology leaving a deep and lasting impact on the space. Today, online shopping dominates the minds of consumers. This shift in buying behavior has forced retailers to come up with new ways to market their products. This makes change the need of the hour, and retailers and manufacturers who have responded quickly to it by staying technologically ahead stand in good stead.

Parallel to this shifting retail landscape, the industry is facing major challenges from a still-strong U.S. dollar, volatile commodity costs and an uncertain global macroeconomic environment. A strong dollar has resulted in suppressed consumer spending across the U.S. as well as lower revenues from foreign tourists. This is hurting the business of retailers who are forced to slash prices and elevate promotions to attract traffic.

With changing macroeconomic as well as consumer habits and channel trends in play, retailers will face many challenges including excess stock, declining sales densities at physical stores and exchange rate effects. Also, the competitive situation will continue to worsen as industry players vie for the top spot, focusing on speedy deliveries and enhanced customer experience, while battling margin pressure.

This apart, retailers face many other problems while carrying out regular business. Some such issues troubling the retail industry are elaborated below:

Online vs. Offline Issue: The rise of omni-channel retailing has heightened consumer expectations and simultaneously problems for retailers. Today, retailers must provide a blend of online and offline experience to engage customers. Moreover, along with an impressive product assortment, pricing, shipping, returns and promotional offerings, it is necessary to introduce personalized customer services in order to satisfy consumers.

Apart from this, there are other problems in the brick-and-mortar store format that need individual attention, like deciding a store layout, fixing places for products and promotions, making a quick test of ideas and arriving at the best decision and implementing it across multiple stores.

However, fixing problems in the online world is easier as data expedites the process of finding problems and solutions, and engineers solve the same in no time. Also, the overhead cost of operating a physical store is a lot higher than that of managing a website. Hence, online retailers sell products at lower costs. While physical stores indulge in lowering prices to match up, this can ultimately weigh on their bottom lines.

New Payment Systems & Minimizing Cyber Risk: With an increase in point-of-sale (POS) systems and online transactions, there has been a significant rise in the number of data breaches. Some of the instances include the ones at The Home Depot Inc. (HD - Free Report) , Target Corp. (TGT - Free Report) , Staples Inc. (SPLS - Free Report) among others, which have heightened concerns regarding the security of consumers’ personal data.

As a result, retailers are now preparing to introduce EMV cards and renovate their POS systems to accept various payment options including chip and pin cards, magnetic stripe cards and NRF payments. Also, technology companies are rolling out new mobile payment apps which are deemed more secure than the traditional magnetic stripe cards, as they use one-time passwords for transactions. With the sudden outflow of new payment options, questions arise on the propensity of the masses to adopt these novel options.

Customer Experience: Today customers are well-informed, thanks to the increased access to online portals that provide every detail regarding the products, ranging from price to reviews. This, along with the fact that every product has some or other alternative makes it difficult for store personnel to convert an in-store sale. Additionally, customers now have high expectations as they want the best product at a reasonable price, assured availability, speedy delivery and more. These factors might hinder the process of driving store traffic and providing the best shopping experience to customers.

A Highly Promotional Environment: The retail industry is highly competitive. To counter competition, retailers resort to excessive and often unplanned promotions that can largely impact sales and erode margins. This is a common scenario during the holiday season, during which retailers proffer huge discounts and offers to meet short-term top-line targets and steal share from competitors. However, increased use of such promotions comes at a price, especially as consumers today are unwilling to pay the full price for the products.

Maintaining Efficient Workforce: In the retail industry, where a salesperson is more like an asset than staff, recruiting a disciplined workforce and maintaining their productivity is very difficult. Retailers generally find it challenging to spot good staff in the first place, and even if they succeed in the process, retaining them becomes tedious.

Further, an improving economy has opened up more employment options and hence the pressure of maintaining a pleasant work environment with competitive wages and scheduling is high. Consequently, retailers like Wal-Mart Stores Inc. (WMT - Free Report) , Abercrombie & Fitch Co. (ANF - Free Report) and The Gap Inc. (GPS - Free Report) have raised their minimum wages, though this has weighed slightly on their profits. However, we consider this an investment in the workforce which will ultimately pay off in the form of improved sales and loyal employees.

Efficient Supply Chain Management: This involves ensuring that the products reach stores in time. Maintaining an efficient flow has been a major challenge for retailers as disruption in supply of products due to miscommunication, changes in requirements or any unavoidable situation is common. This roils retailers’ business with empty racks and cost dollars. An example of this situation is when a customer sees empty shelves after a promotional advertisement. While the customer will only be disappointed on not receiving the product, the retailer will be penalized for such act and not be allowed to run the promotion further despite all the money spent on the advertisement.

Macroeconomic Issues: Though the U.S. economy is gathering pace with a favorable labor market and lower fuel costs, there is the threat of underperformance from the global macroeconomic environment. Apart from this, foreign currency headwinds are playing a spoilsport for retailers with overseas operations. The impact of negative currency translations was evident in first-quarter results and the 2016 outlook of most retailers, as they expect the U.S. dollar to remain stronger throughout this year.

Bottom Line

As you can see, there are plenty of reasons to be worried about the retail industry. However, we believe retailers that treat these threats as opportunities will emerge as winners in the transformed retail space.

While new technologies, changing purchasing habits, and the threat of disruptive competitors raise the bar, retailers that have established omni-channel capabilities and remodeled their stores to better display their products or merchandise are well poised for gains. On the other hand, retailers that have been slow to invest and still rely on traditional marketing methods are bound to suffer.

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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