Market Overview

Zacks Industry Outlook Highlights: The State Of Retail


The retail sector is today dominated by Amazon, which is proving a tough match for traditional retailers. With market share growing for Amazon Prime, Marketplace and Prime Air, as well as the launch of drone delivery, Amazon is poised for exceptional growth. So much so, that Amazon is a threat to most retailers scouring for options to stay in business.

Best Buy has adopted speedy fulfillment by shipping directly from its stores. Moreover, retailers like Macy's, Target and Home Depot have opted ship-from-store to cut down on transportation costs. 

Another concern stemming from Amazon's success story is that retail sector is struggling with lower footfall at stores as all the brands are looking to directly sell to consumers through the expansion of digital stores. This apart, retailers are making strides to enhance mobile experiences through the launch of mobile apps, while also improving the checkout process with mobile wallets like PayPal and Apple Pay.

Additionally, players in the sector have also been hit hard by major economic challenges like a strong U.S. dollar, volatile commodity costs and global uncertainty. The volatility in U.S. dollar has been hurting retailers for quite some time now with worldwide operations.

While retailers are leaving no stone unturned to stay in the game, it remains to be seen if they really have solutions to their Amazon problems.

This clearly shows that the Retail-Wholesale sector is no longer a bed of roses. Some issues troubling the retail industry are elaborated below:

Online vs. Offline: 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.

Further, there are other challenges in the brick-and-mortar store format that need individual attention, like deciding a store layout, fixing places for products and promotions, and a quick test of ideas to arrive at the best decision and implement 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.

Looking at the other side of the coin, pure-play online retailers also face challenges in converting a browsing customer into a buyer. Additionally, these companies incur huge logistics costs in shipping products to customers as well as returns.

New Payment Systems & Mobile Payment Solutions: With an increase in point-of-sale (POS) systems and online transactions, there has been a significant rise in the number of data breaches, which have heightened concerns regarding the security of consumers' personal data. As a result, retailers have introduced EMV cards and renovated their POS systems to accept various payment options including chip and pin cards, magnetic stripe cards and NRF payments.

Further, there has been tremendous growth in mobile payment solutions including tap-and-pay or mobile wallets. It is clear that customers prefer to pay with cards or by using their mobile. So, retailers missing out on these payment options may end up being laggards. It has thus become necessary for retailers to adopt mobile payment solutions that suit them, from mobile POS systems, customized mobile payment apps like the Kohl's Pay, and third-party solutions like Apple's Apple Pay. Speaking of third-party options other noteworthy options are Android Pay and Samsung Pay, which are expanding globally.

Customer Experience/Personalization: Today, customers are well-informed, thanks to increased access to online portals that provide every detail regarding 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. Moreover, customers look for a more personalized shopping experience that they can connect with.

Well, here we can give the example of Nike, which has been offering personalized services like customized sneakers on customer request and the like. However, this kind of personalization is not possible for smaller firms, which can otherwise bank on ideas like targeting customers with a product tailored according to their preferences based on past purchases, or using location-based technology such as beacons to push personalized offers to customers' mobile devices. These tactics may aid in satisfying customers' sky-high expectations.

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. In the past, this was common during the holiday season, when retailers proffered huge discounts and offers to meet short-term top-line targets and steal share from competitors.

However, now we are in the world of constant commerce, which requires lucrative offers not matter how, when and on what one shops. In general, the increased use of such promotions comes at a price, usually strained margins, especially as consumers today are unwilling to pay the full price for products.

Maintaining Efficient Workforce: In the retail industry, where a salesperson is more like an asset than staff, recruiting disciplined workforce and maintaining 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.

Efficient Supply Chain Management: This involves ensuring that the products reach stores on 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 costs 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 an act and not be allowed to run the promotion further despite all the money spent on the advertisement.

Bottom Line

As you can see, survival is tough in the evolving retail space, particularly as Amazon steals the majority of market share. However, retailers vying to stay on should be ready to cover the shortcomings and treat the threats as opportunities.

In a nutshell, online retailing is a major growth driver in the retail industry. Retailers that balance physical and online presence are here to stay. Altogether, retailers providing frictionless shopping experience, online or in-stores, with seamless payment solutions are likely to stay in the market. On the other hand, retailers that have been slow to invest and still relying 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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