In this segment ofIndustry Focus: Consumer Goods, Sarah Priestley is sitting in as host, and she's joined by Motley Fool contributor Daniel Kline to discuss the reality of what's actually happening in retail. The two talk about how perception is not always reality and note that although many retailers are struggling, chains such asDollar General (NYSE: DG)are adding locations at a rapid pace.
The two discuss the Amazon.com(NASDAQ: AMZN) effect and how it's driving some chains out of business while others are figuring out ways to thrive. In addition, they look at some data showing how overall physical retail sales have grown, at least in Q4, even though the perception may be that they have shrunk.
A full transcript follows the video.
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This video was recorded on April 25, 2017.
Sarah Priestley: Retail spending as a whole,according to the Census Bureau, is up5% year over year, and up 17% in the last five years. But the conventional wisdom, as you described it in one of your recent articles,is that the retail industry is kind of dead, it's dying. Andthere's a lot of enthusiasm for that, and I'll play devil'sadvocate here for just a minute and go into that. On the surface, there's a lot of evidence that backs up that point. In the past year or two, we've hadbankruptcies from[Payless ShoeSource], The Limited,Wet Seal,Gander Mountain,Sports Authority, andrecently we're seeing a lot of news about store closures.Macy'sis closing 100 stores,J.C. Penneyover 100, [Sears Holdings]-- 78 Kmarts, 26 Sears locations, and they've even admittedsubstantial doubt in their ability to keep the doors open.Dan Kline:It'sone of those things where what you seeisn't what's actually happening. Youwalk around the mall --we were talking about this upstairs -- the mall near me, the lower-grade mall, about a third of it has become thefake edificeswhere they put a vending machine and a "Coming Soon" sign, and there's nothing there,because a lot of stores have gone out. RadioShack is one you didn't mention; they've closed 1,000 or 1,100 on their way tocomplete oblivion, their second bankruptcy. You look and go, "Oh my God, mall retailers are closing." My Macy's closed; the Macy's I could walk to from my houseliterally closed. And it would seem like that makes sense. The narrative is,the internet is killing physical retailers.Priestley:Yeah. TheAmazoneffect, as people call it.Kline:AndI believed it as well. And thenI went to the Shoptalk conference. I mention this because this research came from a gentleman namedKasey Lobaugh fromDeloitte. What he pointed out, and he only showed one quarter's worth of data, and the people who track retail data,National Retail Federation and others, they don't break outinternet versus physical retailer sales. So this is a bit elusive. But what he said is, during the fourth quarter, the holiday season, the overall dollar growth ofphysical and online was about the same; it was $12 billion each. In terms ofphysical retail, which is much bigger, that turned a 2%-3% gain. On the online side, it was 13%-15% gain. But the reality is, what we're seeing is,failing stores are closing, andthere are plenty of chains that aretaking their places. If you look in the discount space,Dollar Generalis opening 1,000 stores this year, and they opened 1,000 last year. Even chains that have a perception of struggling, likeTarget, are opening and adding. Target is going into markets thatWal-Marthad decided to not go after, which is cities, and they're putting in 20,000- to 30,000-square-foot stores, about 20% the size of their regular stores. You're seeingfragmentation and a shift in retail. Today,there was a story thatWarby Parker, the eyeglasses people who both of us would probably do well to visit, is opening more retail stores. So you're absolutely seeing the Amazon effect killing certain retailers, but it'salso creating opportunity for other retailers.Priestley:Absolutely. I think theretailers that are being rewarded are the onesthat are actually listening to their customer andunderstanding what their customers want. As you quite rightly pointed out, retail as a whole is growing. E-commerce isgrowing at a faster rate, but e-commerce as a wholeis growing.I thinkMoody'sestimatesthe discount environment to grow 7% this year. Obviously,people are still going to the stores. It'snot like we're going to be telling our grandchildren what a shop was like and staying inside all the time. So why do you really think that some of these stores have it right,and what do you think investorsshould be listening out for?Kline:If you'reDollar General, you're competing on price, you'rebasically going in and saying, "Amazon might be as cheap or even cheaper, but I have it now." They have hitthe sweet spot when it comes to pricing. But a lot of the chains that are working areones that offer an experience.Best Buyhas turned the corner, and part ofthe reason Best Buy succeeds when we just losthhgreggis, when you walked into hhgregg, it was a very 1980s retail experience. There wererefrigerators over there, there were stereos over here, there were computers. There was nothing joyous or interactive about the store. When youwalk into a Best Buy now,you can go play with aNintendoSwitch,you can go sit in a chair and try out different audio systems. There's stores within a store, which is a conceptJ.C. Penney is using, too. We've talked, I have a background in retail, I ran a giant toy store for two years. If yougive people a reason to come in, it could be as simple asthere's a coffee shop in my bookstore andpeople want coffee,if they have to walk by all your merchandiseon the way to the coffee oron the way to play the Nintendo Switch oron the way to get a haircut at J.C. Penney ortake their picture at Sears or wherever it happens to be,that's a chance to capture them as a customer.
So retailers have to think smarter.I think that's something that Macy's missed out on, and Searsreally missed out on. Yougo to Sears now and they're struggling, andit's still hard to find the merchandise you want. They have not made them. AndI buy clothes at Sears sometimes; they have notmade the shopping experience easy. Thealternative is, I can go to Amazon and say, "I want pants; I want this size and color," and in two days they show up,and if they don't fit, I'm supposed to return them but I don't, soAmazon just gets another pair of pants sales from me.
Sarah Priestley has no position in any stocks mentioned. Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Moody's. The Motley Fool has a disclosure policy.