For the first time since mid-2015, Moody’s Investors Service on Thursday changed its outlook for U.S. retail to positive from stable, saying the industry is reaping the benefits of a strong economy and their own investments in e-commerce and operating efficiencies.
Amazon and other e-tailers, home improvement retailers, off-price retailers and dollar stores will continue to grow, while even "department store declines will taper," with some improvement expected among specialty retailers, supermarkets and drug stores, according to the report.
What Moody’s expects to be strong holiday sales will continue into 2019, the firm said in a report emailed to Retail Dive, forecasting retail operating income growth of 5% to 6% and "steady" sales growth of 4.5% to 5.5%, up from a previous forecast for 3.5% to 4.5%. E-commerce "will eclipse 20% of total retail sales in the next five to six years compared to about 14% today, Moody's analysts also said.
Retailers have grappled with some intense challenges in recent years, including a generational shift in consumer habits and preferences, new expectations for online-offline shopping and fulfillment, a drastic over-building of the physical footprint in many cases and discount-inducing, margin-killing problems with inventory in others.
Moody's sees many players as getting through to the sunny side of much of that. "[T]he store rationalization process that began in earnest about three years [ago] has helped many retailers streamline their operations and better provide their consumers with a seamless shopping experience – regardless of whether they shop in the store or online," Moody's analysts said. "Better inventory management has also led to lower promotional cadence and improved gross margins in the department store sector. All of this has spurred sales and operating profit growth, which has surpassed our initial expectations."
While Moody's expects e-commerce to grow, analysts also expect retailers besides Amazon to increasingly take more of that pie, noting that "Walmart is forecasting 40% growth, and Best Buy has been in the 20% range off of a sizeable proportional base."
Not that any retailer will catch up to Amazon, according to Moody's, but, then again, Amazon is hardly a brick-and-mortar retailer, despite its increasing number of stores and its acquisition of Whole Foods, according to the report.
"The online giant continues to lack the basic physical infrastructure and deep customer base that retailers relish, with roughly 85% of retail sales still getting rung up in physical stores," according to the report. "If anything, many of these retailers are turning up the heat with their own same-day initiatives to widen their competitive advantage over Amazon. This is proving costly for many, and the outcome of these efforts remains unclear. However, for now we see Amazon's seemingly 'offensive moves,' such as delivery promotions, as more defensive and aimed at avoiding the expense of developing or acquiring a meaningful brick-and-mortar presence."
Not all analysts are as sanguine about retail’s advancements, however. Nomura Instinet analysts, for example, in a report emailed to Retail Dive this week, cited wage hikes, "unappreciated excess inventory," and "meaningfully uncertain back and forth of trade war and tariffs" as concerns, although they noted that several brands have already been shifting their sourcing away from China for years, which will mitigate the tariff problem for many. "[B]eyond potentially nascent global issues, we remain most concerned over the return of promotions needed to clear goods over holiday domestically," according to Instinet analysts led by Simeon Siegel.
And the industry has many more stores to shutter, warns retail analyst Nick Egelanian, president of retail real estate consulting firm SiteWorks. But more importantly, retailers don't yet have a good handle on what kinds of consumers millennials and Gen Z will be.
"There is a real generational change in retail going on, but there's reality and myth going on at the same time that has everybody guessing," he told Retail Dive in an interview. "A ton of people say that the millennial generation is completely different than our generation. We formed families at 23 and they’re forming families at 34, so we don’t really know what they’re going to do yet. Everybody thinks that the millennials are these urban kids, but most are not very wealthy, they're living hand to mouth. Everybody thinks that millennials aren’t going to shop like their parents. We don’t know that. That’s the other big elephant in the room."