7 trends that will disrupt and define retail in 2018
From renewed investment in brick and mortar to a growing appetite for acquisitions, here's what to expect in the year ahead.
It's been a tumultuous time for retail, and 2017 has set records — a lot of them to the negative with store closings, bankruptcies and CEO departures filling up the news feed. There have also been quite a few bright spots: Walmart finally hit the gas in its competition with Amazon, e-commerce pure plays began investing in brick and mortar and new technology began to go mainstream (yes, we're talking about Amazon's Alexa).
Retailers are coming off the best holiday season since 2011. Sales surged 4.9%, according to Mastercard SpendingPulse, and e-commerce jumped 18.1%. So while many retailers are still struggling to find their niche or shed debt loads, others are investing in new technology, stores and programs to ride this wave of strong consumer confidence. No doubt, 2018 will be as exciting as the past year.
Looking ahead to the new year, here are seven trends expected to disrupt and define 2018.
Bankruptcies will slow
Legacy debt from private equity buyouts, recent overexpansion of retail footprints and secular changes in the industry sent a record number of retailers into bankruptcy last year. With tens of billions of dollars in debt coming due over the next two to three years, expect more bankruptcies. Just how many is hard to say, but 2018 could be a bellwether year in gauging just how much longer the "retail apocalypse" will last.
"A year ago, you had major industry participants like Macy's and J.C. Penney announcing store closures that represented up to 15% of the chain, in the case of Penney's," Philip Emma, a retail analyst with Debtwire, said in an email to Retail Dive. "In the first half of the year, you also had more than 800 specialty apparel stores close between Wet Seal, BCBG, American Apparel, The Limited and BeBe Stores." That meant distressed retailers had to compete both with e-commerce incursions and liquidating stores, "making it difficult to sell your way out of a problem and to get vendors/factors to stay supportive," Emma added.
"With fewer stores expected to close in 2018, there may be an opportunity for the survivors to generate some better margins by not having to compete against [liquidation] sales," Emma said. "I think you can look at both J. Crew and Neiman Marcus, who, while still facing challenges, have seen their results start to improve because they have started to align their inventory levels to their sales results, providing an opportunity to push up gross profit margins."
"I think for the first time in a few years, you can at least see some mitigating factors that can provide a troubled retailer with options," Emma said.
Acquisition fever heats up
Amazon's purchase of Whole Foods was the talk of retail last year. But 2017 saw plenty of other acquisitions, as well — Walmart had a couple, as did Target. The year also brought aborted acquisitions (Macy's, Neiman Marcus and Abercrombie among them) and acquisition speculation. With competition as fierce as ever, and retail valuations relatively depressed, don't expect the frenzied pace of buyouts to slow. In fact, Neil Saunders, managing director of GlobalData, thinks the pace could increase, as retailers "look to both consolidate their positions in the market and embark on new ventures in the digital space."
M&A speculation started with a vengeance in 2018, as one venture capital guru posited Amazon could buy Target. "Target is in an interesting position as it is recovering nicely and has a solid proposition, yet remains undervalued," Saunders said, adding that it would complement Amazon's push into physical retail.
"We could see the disappearance of Kmart as a physical retailer as more stores are shuttered."
Managing Director, GlobalData
Saunders posited plenty of other possible matchups, as well. "Some of the better department stores like Kohl's, Nordstrom or Dillard's may also be of interest," he said, adding that he latter two might be better positioned for private equity buyouts, given their ownership structures. Sears is likely to sell off more brands in 2018, as it continues to plug financial leaks, Saunders said. "We could also see the disappearance of Kmart as a physical retailer as more stores are shuttered."
Beyond department stores, "luxury players like Coach and Michael Kors will be keen to make a few more selective acquisitions this year, although they are likely to focus their sights on smaller niche brands that they can develop and grow." Also look for Walmart to take on more "smaller, niche brands that can add value to its proposition," Saunders said. And while apparel has been a hurting sector, full of ailing retailers, "reasonable brands that are in financial difficulty might be appealing to those wanting to grow their presence in fashion," Saunders added. "Players like J. Crew and Abercrombie come to mind."
Personalization takes a new form
There are few terms buzzier than "personalization" in retail today and the quest for this holy grail will only accelerate into 2018. In fact, retailers will invest more in personalization efforts this year than any other area of retail, according to Forrester Research.
"Personalization is a bit like the weather — everyone talks about it, but almost no one is really doing anything about it."
Co-founder and Managing Partner, RSR Research
Of course, "Personalization and customization seem to mean many things for retailers," Neil Stern, senior partner at McMillanDoolittle, told Retail Dive in an email. "For customers, it's as simple as being able to get what you want and the ability to make changes, large and small — to have it suit. While it manifests itself in technology like Nike ID, Audi Configurator or Converse Blank Canvas, it can also be as simple as free alterations or the ability to manage digital coupons."
"Personalization is a bit like the weather — everyone talks about it, but almost no one is really doing anything about it," Paula Rosenblum, RSR Research co-founder and managing partner, told Retail Dive. "Personalization is more than just sending targeted emails… it involves the entire customer experience, and that doesn't happen overnight."
But it is happening at an accelerated rate and is no longer just about predictive technology, according to Brendan Witcher, principal analyst at Forrester Research. "We've actually evolved from what I call personalization through segmentation to personalization through individualization." The Lowe's Holoroom, Starbucks' payment app and Sephora's beauty stations are all good examples.
And for the first time, retailers are investing in personalizing the physical store, not just the online experience, notes Witcher. Personalization has been cited as the No. 1 investment by retailers to Forrester Research for several years, but 2018 marks the first time that survey respondents (72%) said they planned to extend personalization projects to stores.
Brick-and-mortar experimentation to increase
It's been a while since brick-and-mortar retail just meant four walls and some product-laden shelves. In the past year or so especially, traditional retail has fallen by the wayside as retailers open showroom-style storefronts, like the merchandise-free Nordstrom local, or temporary, over-the-top installments like Glossier's holiday popups and Calvin Klein's Amazon offerings.
But even permanent fixtures are changing the way they do business, and beauty retailers are leading the pack: Sephora is reporting great results from its Beauty TIP workshops and in July, debuted a new small-format offering. Far from winding down, these experiential brick-and-mortar stores are here to stay — and they'll likely bring more technologically-enabled concepts with them.
According to Deborah Weinswig, managing director at Fung Global Retail & Technology, a retail think tank, the idea behind this new breed of retail is to be a resource for the shopper, a new kind of experience. To somehow "get the customer to make the store more a part of her life, to 'live more of her life' there." That also means making sure store associates have the technology they need to better cater to customers — mobile, IoT or otherwise — and we can expect much more of that as we head into 2018, as well.
"It's all about testing and learning, and if it fails, it's about failing fast so you can get back to creating and testing something different," Ray Hartjen, director of content marketing at RetailNext, said in an email to Retail Dive. This experimental attitude will only continue in 2018, with more online retailers moving into the brick-and-mortar space and more brick-and-mortar retailers raising the bar to compete on in-store experience.
"The evolution of the brick and mortar store is just beginning," Michael Brown, partner in the retail practice of A.T. Kearney, a global strategy and management consulting firm, told Retail Dive in an email. "And we expect the cycle of change to continue for a number of years as retailers continue to find the balance of physical and digital assets required for omnichannel success."
Technology gets personal — and practical
There are a lot of shiny objects in technology at the moment. Artificial intelligence, augmented reality and virtual reality hold a lot of promise, but most experts polled by Retail Dive believe it's still too early to declare 2018 a breakout year for any.
"The reality is that smart retailers aren't making investments in technology for technology's sake. No one is going to walk into a retail store this year and say 'there's no VR, I'm out of here.'"
Principal Analyst, Forrester Research
"The reality is that smart retailers aren't making investments in technology for technology's sake," Forrester's Witcher told Retail Dive in an interview. "No one is going to walk into a retail store this year and say 'there's no VR, I'm out of here.'"
There are niche situations where AR or VR make sense, Witcher said, such as the ability to view a new kitchen before a remodel or see furniture virtually placed in a room, but for the most part, the applications here are currently limited.
Instead, 2018 will likely be a continuation of the biggest tech trend of 2017 — voice assisted shopping. Amazon and Google had themselves a good old fashioned price war during the holiday season, discounting smart speakers and devices to enable consumer interactions via voice.
"Voice will continue to boom," Joe Scartz, chief digital commerce officer at shopper marketing agency TPN told Retail Dive in an email. "The holiday buying spree that moved Echo and Google home devices like hot cakes means that voice is reaching the mainstream. We will see the first ads on Alexa that drive users to place specific branded (or private label) products into their cart — brands will begin to be disrupted by voice."
Private label grabs the spotlight
The rise of private label in 2017 was astonishing, with retailers like Amazon and Target standing out in particular for their breadth of new proprietary lines. In 2018, other retailers will likely follow suit — and for good reason.
"Private label allows retailers to provide an experience that can't be easily replicated," Matt Sargent, senior vice president of retail for Frank N. Magid Associates, told Retail Dive in an email. "An essential trend for 2018 will be seen when winning retailers look to cultivate and promote their private label brands more aggressively. This is also a huge risk factor for manufacturers who will struggle to maintain equity in brands they have built over time.
So why are retailers making such a big push to develop their own brands? A few simple reasons: gross margin dollars, leverage with national brands and exclusivity — all of which have become increasingly necessary priorities. "That's what Target has done really well," Rosenblum told Retail Dive."When they get a designer to do a line of home goods, it creates an air of cheap chic that frankly, made the Target brand what it is. Other types of commodity items are much more around 'good value.'"
Rolling out private label lines will be easier for some retailers than others. "You don't just 'poof' create a brand and expect people will start buying it — especially in grocery," Rosenblum said. "As I recall, Walmart got whacked pretty hard the last time they tried to make a quick switch from Hefty bags to their own private label. I always use the Publix example: buy a national brand and get a private label version free. They did six of these a week during the Great Recession and managed to really highlight value and quality, simply by extending the offer."
The bottom line is that retailers pushing into this sector as they look for growth need to keep in mind that in order to be successful, private label brands need to have an exciting differentiating factor that entices shoppers — and is about more than just price.
Marketplaces evolve into online malls
With brands like Nike, Land's End and Lord & Taylor flocking to marketplaces (namely those ruled by Amazon and Walmart) as they look for new sales growth, it raises the question: Are marketplaces the new malls?
The rise of marketplaces and brands selling on them has stirred a controversial discussion about the implications for brands. Some onlookers suggest the move cannibalizes sales and taints higher-end brands, but others say there's not much of a choice these days as foot traffic to brick-and-mortar stores and malls continues to fall.
"Our data is telling us that marketplaces are a great way for emerging retailers and brand managers to get started," Rosenblum said. "As long as the marketplaces themselves don't force a decision between them (Amazon or Walmart, not both) I see a good long-term opportunity. Splitting the market isn't going to be useful to anyone."
Yet, considering the fierce price war that Amazon and Walmart are already wrapped up in, it's not unlikely that as more brands turn to these marketplaces, competition will heat up and brands may be forced to choose one over the other.
"Likely, higher-end brands would pick Amazon, and "mass" brands would pick Walmart… but I don't like the idea at all," Rosenblum said. "On the flip side, we could see an inverse price war, with each marketplace charging less for their services. Good for the emerging brands, not so good for the marketplaces — especially Amazon, who uses it to mask their retail losses."
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