How Healthy Is the Retail Industry and What Lies Ahead?
Last year seemed to be a banner year for store closings, with some calculating that some 7,000 retail doors slammed shut in the United States as major companies filed for bankruptcy or downsized their footprint.
With the economy marching steadfastly forward, consumers are confident again and cranking up their spending, as seen with June retail sales increasing 4.2 percent over last year.
Still, troubled retailers including Claire’s, The Bon-Ton Stores, Nine West Holdings and Toys R Us filed for bankruptcy this year.
With so much competition from online sites, the question remains: What does the future portend for the bricks-and-mortar stores that survived?
With this in mind, we asked finance experts and factors to give us their take on the retail industry and how it is shaping up this year.
Darrin Beer, Western Regional Manager, CIT Commercial Services
We’re seeing some interesting cross-currents—both positive and negative—playing out in the marketplace through the first half of 2018.
While we continue to see store closings, there are positive economic signs that bode well for the remainder of the year. Consumer confidence remains high, wages have been rising and unemployment is low. In fact, the number of Americans filing for unemployment benefits recently fell to the lowest level in 48 years.
More spending power in the hands of the consumer is clearly a plus.
Year-to-date, the overall retail sector has been performing well and trending toward the top of the 2018 growth range of 3.8 percent to 4.4 percent forecast by the National Retail Federation.
Of course, it remains to be seen how much of that spending will occur in the apparel sector and take place in retail stores. The good news is that despite thousands of store closings, particularly among weaker and bankrupt retail chains, some apparel retailers are performing well. And those are the ones manufacturers want to do business with.
Successful retailers are investing in new technologies to improve the in-store experience while better forecasting consumer buying habits to improve inventory levels and mix—essentially aimed at having the right product at the right time.
Apparel manufacturers now have to deal with a shrinking customer base while focusing internally on shorter lead times, product development and creativity, marketing/branding via social media, and sustainability.
Factors can proactively assist apparel manufacturers in navigating these ongoing industry changes and leveraging our industry knowledge. Also, at this point in the market’s evolution, it’s especially important that apparel manufacturers have credit protection on their receivables and work with a financial partner who understands their business.
Mark Bienstock, Managing Director, Express Trade Capital
The shift from bricks and mortar to online retailing has been dramatic. The mall-based retailers have been especially affected over the last two years.
Unless the traditional retailer was proactive in establishing a solid web presence, they are at an extreme disadvantage in today’s environment.
Nordstrom is an excellent example of a retailer that has been at the forefront of retailing. The company has an outstanding omni-channel approach to retailing. In addition to the Nordstrom name, they also have Nordstrom Rack, Hautelook, which is a strong web presence and a new retail concept that allows consumers to shop in-store and have the merchandise shipped to their home without the store carrying any inventory.
It is proactive thinking that is required by the retail industry in order to be able to compete with the Amazons of the world.
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal of California
The retail landscape continues to cause disruption in the apparel industry. The consolidation of years past, bankruptcies and reduction in doors of those who are still around has left many fewer avenues for apparel manufacturers and importers to sell their goods.
While it’s true that online retail continues to grow (either through third-party sites such as Amazon and brand-direct websites), its increases are smaller than the reduction in bricks-and-mortar sales. This creates a tough environment.
The consumer of today is not purchasing apparel as robustly as in the past. It’s a supply-and-demand issue. The supply of apparel is larger than the consumer demand for it.
The apparel industry needs to adapt to the new normal by keeping its inventory levels under control and nimble with their operating expenses. And the reduction in doors is likely to continue, further emphasizing the need for apparel companies to be quick to react to market needs.
Gino Clark, Managing Director, Originations, White Oak Commercial Finance
The retail industry reflects ever-changing consumer demands. Shifting distribution channels have resulted in excess per capita retail space. As a result, the number of recent store closures comes as no surprise as retail store capacity finds its equilibrium.
Store closures continued despite an expanding economy. These closures aren’t based upon the inability of the consumers to purchase goods but reflect a change in consumer preferences. The ease of shopping online is here to stay.
While retail space is readily available, warehouse space is not. Economists recently reported that warehouse space is in high demand and supplies are the tightest they have been over the last 20 years.
A good example of a retailer adjusting its business model is Walmart. The company made a significant investment in Jet.Com to take advantage of the online model. Now, Walmart is expected to expand into New York City by investing in a new e-commerce distribution center rather than opening a retail store. The retail model will continue to shift as consumers crave direct shipments.
Retailers with limited resources may use bankruptcy as a means of helping to change underperforming business models. Alternatively, other companies that have resources chose to close underperforming stores without having to file a petition for bankruptcy while expanding their online platform. In either case, these adjustments are necessary and will help strengthen the apparel industry in the long run.
Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.
I think the U.S. retail industry is a mixed bag. There are still issues with traditional bricks-and-mortar retailers with some still having credit issues, continuing losses and store closures.
E-commerce is continuing to grow, but many retailers are still trying to find their way through this. I have read recent information that some major retailers are starting to hire seasonal workers earlier than in previous years to keep pace with back-to-school and holiday demands. So this is a good sign for retailers.
How this affects the apparel industry has yet to be fully seen by me. The real test will be with increased Fall/Holiday orders and hopefully a continuing flow of orders thereafter. This includes orders from traditional retailers as well as e-commerce retailers where business continues to grow.
That said, at this point in time it appears that orders for the last part of the year are going in the right direction for apparel manufacturers and importers. Another significant issue for the apparel industry will be retailers’ credit status. Getting orders is critical, but having credit approval is vital for getting the orders produced and shipped.
Kee Kim, President and Chief Executive, Finance One
Closure of many retail stores can be attributed to two main trends: With consumers’ increasing tendency to focus on value, business volume has shifted to discount retailers such as T.J. Maxx, Ross and Burlington. With online businesses’ growth, both existing and emerging online retailers have taken away business from bricks-and-mortar stores.
While store closures allowed for apparel retailers to reduce their losses and improve their bottom line in the short run, the surviving retailers must plan and execute mid-to-long-term strategies to address constantly changing consumer preferences in the shifting retail landscape.
Adding to the challenge, apparel brands and retailers are now faced with increased sourcing costs due to the new tariffs and the hostile trade policies.
Robert Meyers, President, Republic Business Credit
I believe the worst of the retail apocalypse is over. According to Deloitte’s 2018 Retail Outlook, healthy growth is expected in the 3.2 percent to 3.8 percent range. While this growth won’t apply for all retailers, consumer-spending confidence remains very high.
Consumers demand an omni-channel experience where they can seamlessly interact across all buying mediums. There are several avenues that retailers will use to innovate their operating models and technologies they will apply to improve the consumer experience. Some of the traditional retailers won’t survive the decade as they didn’t innovate fast enough. Retailers that adapted, innovated and remained flexible will flourish in 2018. Several public retailers—including Nordstorm, Best Buy, Tiffany’s, Kohl’s and Macy’s—smashed analysts’ expectations.
Apparel companies that combine the right wholesale strategy with an intelligent e-commerce strategy will also succeed. At the end of the day, apparel companies will be defined by their ability to execute a customer-centric go-to-market strategy.
Dave Reza, Senior Vice President, Western Region, Milberg Factors
The retail apparel industry continues to undergo a technology-fueled metamorphosis. Changing consumer buying patterns and expectations coupled with legacy costs associated with buy-outs in the past decade continue to stress many regional and national retailers.
Despite a recent uptick in year-over-year sales, there are signs of distress that suggest that there are still retailers facing the possibility of reorganization in the coming months or 2019.
In addition, there is the looming impact of possible tariffs, which would drive up prices and possibly create short-term disruption on the supply side. These alone would affect all retailers and, in particular, might be the final straw for some operators.
The ability to operate profitably while redeploying capital into omni-channel commerce, along with revitalizing their bricks-and-mortar presentation, will be a must for those operators seeking to remain in the game. Because these attributes are not easily achieved, we can expect to see continued consolidation at both the retail and wholesale levels.
Kevin Sullivan, Executive Vice President, Wells Fargo Trade Capital
While the consumer-goods economy remains pretty robust, there is little doubt that we’re in a period of significant reinvention within the U.S. retail industry.
The direct-to-consumer marketplace has continued to expand and the consumer has clearly continued to become more comfortable with ordering a broad range of apparel online. In some segments, subscription models have continued to gain traction, and many brands have opted to devote more resources to developing the direct-to-consumer channel, while also paring down their bricks-and-mortar customer base to those retailers able to tell a great story around product, who also still have the financial wherewithal to thrive and grow in a changing economy.
The unfortunate result is that we continue to see larger retail bankruptcies among those retailers who are either too highly leveraged to pivot to a new strategy, no longer relevant or both. We’re also seeing a narrowing of specialty-store bases as apparel companies re-evaluate who their key customers are and where they want their product to appear.
While legacy brands are now re-evaluating their market strategy, we’re seeing newer brands that tend to start as direct-to-consumer plays, while eventually opening a limited number of company-owned retail locations.
Only then do they tend to branch out into selling a handful of retail partners who they view as viable and potentially long-term channels of distribution. It’s also interesting to note that retailers who are able to provide on-site customization of product for customers are doing very well, which only further underscores the fact that consumers have grown very accustomed to receiving product how and when they want it.
Ken Wengrod, President, FTC Commercial
It has taken decades for manufacturers to realize that the true customer is the end-user and the consumer, not the retail stores. They have woken up and now fully understand that the consumer has the ultimate control. Although malls are going dark and traditional apparel stores are suffering, consumer apparel purchasing is actually expanding—but not in the traditional avenues.
Traditional retailers have lost touch with their consumers. There is a pent-up demand to re-market the perception of beauty. Appealing to the heroin waif is out and growth is with the forgotten women who has curves, which is a significant part of the U.S. population. These consumers are searching for merchandise that will not only enhance their specific body types but also make them feel good.
Today, the growth is with online—either through operations like Amazon or other companies that are expanding their direct-to-consumer platforms such as Stitch Fix and Fashion Nova. Also, millennials are looking for legitimate merchandise. They are not interested in the fluff. They are genuinely concerned about the sensibility of the merchandise. They want to know if the goods are manufactured without forced labor or ghost workers and the fabric is sustainable.
Bricks-and-mortar retailers need to develop a reason for millennials to break away from their cell phones or laptops and get out of the house, just to experience a concept store. Nordstrom is attempting to accomplish this by creating smaller stores of approximately 5,000 feet or less.
The off-price stores—including TJ Maxx, Ross Stores and Burlington—have also expanded. These consumers are searching for value with exceptional pricing. These operations are sourcing from manufacturers that produce locally and offshore at very tight margins.
Manufacturers need to adapt to this shift by placing more emphasis on the ultimate consumer and understanding their triggers to purchase apparel. To properly play and stay in this market, they first need to find competent vendors that are capable of accomplishing their vision.
This cannot be a simple plug-and-play approach. Instead, they should consider revamping their entire internal operations. They need to have a great back-end operating system that can analyze altering consumer behaviors. Owners need to have a good understanding of the current social-media effect.
It is crucial to have a proper marketing plan that utilizes micro-influencers or other sources to create demands for their merchandise. They also need to find a proper logistic center that can ship small orders directly to the consumer without exorbitant shipping costs. The winners are already developing a comprehensive strategic plan to prosper in our changing environment.
For the manufacturers with brand recognitions, the foreign markets are still craving U.S.-made goods and/or -designed goods. China is the world’s second-largest luxury market that is still demanding U.S.-made goods. We can’t forget that 95 percent of the potential market sits outside of the U.S., tariffs or no tariffs. With the right merchandise, people will pay for it. They are searching for legitimate goods that represent American lifestyle.
The bottom line is where there is turmoil there are major opportunities to expand in this new environment. The players must be willing to change their paradigm. Without the right armor, it’s not wise to enter the game.
Adam Winters, President and Chief Executive, Merchant Financial Group
There is a great deal of economic momentum coming off a strong second quarter in 2018, which had most major retailers see an increase in their comp-store sales. The forecast for the second half of the year is really strong.
The increase in retail sales will continue for all retailers, from department stores such as Nordstrom to middle-market stores such as Dillard’s to lower-priced stores such as Walmart to discount retailers like T.J. Maxx.
Store closings and bankruptcies of the past year were largely driven by a natural consolidation in the market after years of over-expansion of stores. What resulted is a market that is more sustainable. The apparel industry is now well-positioned, and we’ll see continued growth because of the current economic boom, which is being fueled by tax cuts and a low unemployment rate.
Paul Zaffaroni, Managing Director, Roth Capital Partners
The U.S. retail industry continued its downsizing in 2018, which is a function of the continued growth of e-commerce and its over-built retail footprint relative to other countries.
These changing industry dynamics have required apparel companies to evolve or become extinct. Digitally native apparel brands and e-commerce business models have flourished in today’s environment while wholesalers dependent on department stores have struggled. Foot traffic is down at department stores and their approach to markdowns has not improved.
Retail is not dead, but it has to be part of an omni-channel strategy that is integrated across multiple channels including digital, catalog, company-owned stores, pop-up stores and wholesale.