5 trends that are reshaping retail 5 trends that are reshaping retail http://www.federatedinvestors.com/static/images/fed-logo-amp.png March 15 2019

5 trends that are reshaping retail

It's not just online shopping. Retailers are using big data in all its forms to anticipate and meet customers' needs ... and to operate more efficiently, too.
Published February 5 2019
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Retail’s growing fragmentation and digital transformation are providing customers more choice than ever in terms of selection, pricing and convenience. Meanwhile, technology is giving retailers unprecedented insight and predictive analytics with which to engage customers. Portfolio manager Barbara Miller says much of what’s happening is the amplification of trends that have been occurring for several years. She discusses these trends and what retail’s fast-evolving landscape means for investors.

  1. Omni-channel In its simplest form, omni-channel represents the myriad ways that retailers reach and serve customers. As lines blur between in-store and online shopping, companies that operate brick-and-mortar locations are altering them to serve customers both as traditional destinations as well as spaces that can serve as online delivery or merchandise pickup hubs. Think ordering online with delivery for pickup at your nearest discount or home improvement store. We expect increasing presence of e-commerce within traditional stores as retailers consolidate their inventory across channels so they can more efficiently deploy their working capital and employees. This same trend is occurring at restaurants, too. Delivery is to restaurants what e-commerce is to retail stores. This especially is the case among fast-casual venues where delivery is taking market share from dine-in locations. Whether store or restaurant, physical locations are being reconfigured to accommodate customers, however they want to be served: delivery, prepaid pickup at the curb or sit-down at a table. Those companies unable to make the shift will be left behind.
  2. Big data and artificial intelligence Moving far beyond mass generic email pitches, big data allows retailers to customize messaging, offers and product suggestions based on a customer’s order history, loyalty programs and online searches. The biggest challenge is having the means to effectively analyze and use this data. But the more customers are willing to part with their data by engaging on the web, the more savvy retailers will focus on fine-tuning customer approaches.
  3. Value retailing Everyone loves a deal.  When well-executed, this is one category where traditional box-store retailers—from Dollar Tree to warehouse clubs like Costco—continue to succeed. A growing outlet for value shoppers are reuse online retailers such as Poshmark, thredUP and The RealReal. Beyond the lure of off-price retailers, it’s easier than ever for customers to do comparison shopping online. Except for certain high-end brands with limited distribution that target customers who aren’t concerned about price, it is hard to avoid the pressure to price match or discount.
  4. Functional fashion This represents among the most durable trends in an otherwise highly fragmented apparel category. These favored athletic and high-end outerwear brands have been able to consistently command higher prices and loyal customer followings in the midst of the often chaotic pace of fast fashion. A combination of technical advances in fabric and construction, along with lifestyle choices around healthy living, are helping to support this trend.
  5. Automation As labor costs increase and customers demand more convenience, there is increasing focus on automating operations from ordering to self-service checkout to creating no checkout destinations as is the case with Amazon Go. We expect growing use of robotics and, eventually, delivery drones. Automation also is a growing trend in the restaurant space as food ordering and delivery is taking market share from in-restaurant dining.

A reality running through all of these trends is the growing fragmentation of consumers. The vast number of ways and places to shop or dine make it increasingly difficult to attract and hold onto a critical mass of customers. Consider how easy it is to open an online store using the Shopify app. Small producers can sell on Amazon and eBay. They can use social media influencers and blogs to create a following without the need to invest in big, expensive ad campaigns. In fact, being adept at creating buzz is an essential for companies big and small to attract loyal followings. It’s a case of Goliath imitating David as the big companies attempt to create the same excitement and interest as their niche counterparts.

Rising labor and delivery costs, and potentially tariff pressure, virtually guarantee that companies can no longer depend on operating margin expansion to drive earnings growth. In this landscape, the clear losers are those “in-the-middle” traditional retailers that don’t have the merchandise that people crave or the convenient access they demand. And they don’t have the cash flow to make investments fast enough to improve their competitive position. The bottom line for investors is that however the macro environment ebbs and flows, the consumer space will be increasingly dominated by those who can maintain and grow market share by staying ahead of the technology and the ever-evolving customer.

 

Tags Consumer Spending . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Global Investment Management Corp.

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