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Turbulent times for retailers

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The just concluded holiday selling season was a good one for most retailers. Ample anecdotal evidence of strong consumer demand was confirmed shortly after Christmas in a report issued by Mastercard. Based on tracking of retail activity within the credit card company’s network, supplemented with survey-based projections for such forms of payment as cash and checks, Mastercard SpendingPulse found that, from November 1 through December 24, total retail expenditures rose 5.1% to exceed $850 billion. It was the industry’s best year-over-year performance since 2012.

The overall performance provides some reason for optimism as 2019 begins, but a closer look at the results indicates that more turbulence in the sector lies ahead. As usual, outcomes varied considerably by merchandise segment and trade class. Sales of home improvement products, for instance, increased 9%, while despite society’s obsession with technology, consumer electronics and appliances volume retreated 0.7%. Depending on which category a retailer is involved in, prospects look very different.

Not surprisingly, perhaps the most compelling finding in the report is the ongoing boom in e-commerce. Mastercard SpendingPulse found that online retail sales during the holidays jumped 19.1%, almost four times the overall percentage gain for the industry. Even department stores, a trade channel that struggled, registering a 1.3% decrease in holiday business from 2017, posted growth of 10.2% in e-commerce.

Amazon, the dominant force in online retailing, led the charge, reporting record holiday volume and “tens of millions of people” either trying out or signing up for its Prime program. “This season was our best yet, and we look forward to continuing to bring our customers what they want, in ways most convenient for them in 2019,” said Jeff Wilke, the company’s chief executive officer for worldwide consumer. “We are thrilled that, in the U.S. alone, more than 1 billion items shipped for free this holiday with Prime.”

With Amazon setting the pace, e-commerce can be expected to surge in 2019, fueling ongoing shifts in how, when and where people shop. The trend will spur the realignment of resources at brick-and-mortar retailers, a process that is well under way at such companies as Walmart and Target. Conversely, as traditional retailers develop and enhance their digital capabilities, enabling them to offer customers robust omnichannel options, Amazon is likely to come under increased competitive pressure.

A story in a recent edition of The Wall Street Journal, citing unnamed sources, said that Amazon is already planning to accelerate the expansion of the Whole Foods supermarket chain across the country. Adding stores would serve the dual purpose of providing Amazon with a base from which to grow its e-commerce food business and give grocery shoppers who prefer to shop in person the opportunity to do so.

A significant enlargement of Amazon’s physical store base, coupled with the aggressive moves that such food retailers as Walmart, Kroger, Albertsons Cos. and Ahold Delhaize are making in the digital realm, will trigger a new round of consolidation in the supermarket sector. Regional chains, which are still far more prevalent in the grocery business than they are in other trade classes, are already being squeezed by the need to invest in advanced technology and delivery services, while simultaneously keeping prices low to fend off challenges from e-commerce companies and such hard discount grocers as Aldi and Lidl. Two thousand nineteen will likely see many regional players choose to sell out to larger entities that are better equipped to contend with the new realities.

That process is already in the works. As this column was being written, Ahold Delhaize announced that Stop & Shop, the largest chain in its U.S. division with more than 400 stores in Massachusetts, Rhode Island, Connecticut and New York, agreed to acquire King Kullen Grocery Co. The deal includes 32 food stores and five Wild by Nature outlets on Long Island.

Another significant change in the retail landscape likely to occur in 2019 is the disappearance of the iconic Sears and Kmart chains, each of which at one time dominated the sector. The probable liquidation of Sears Holdings and its assets followed the reported failure of chairman Edward Lampert’s attempt to purchase several hundred of the company’s best remaining stores as part of its Chapter 11 bankruptcy process, which started last October.

While the demise of two of the great names in mass market retailing is certainly lamentable, it is hard to see how their sinking fortunes would have changed under Lampert’s continued leadership. Since bringing Kmart and Sears together in 2005, Lampert has presided over steady declines in sales and customer traffic, triggering a prolonged death spiral that finally ended in bankruptcy. During that period, sources say Lampert often ignored the advice of the experienced retailers that he hired to help revitalize the operation. Thirteen years is more than enough time to realize a turnaround, particularly in an era when the application of digital technology to retailing has compressed the time companies have to respond to emerging challenges.

The fate of Sears Holdings should serve as a warning for other retailers to avoid becoming complacent and assuming that past success, no matter how impressive, and a well-known brand name are enough to keep attracting consumers in a rapidly changing world.


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