The retail winners and losers of 2016
Some retailers spent the year readying for the industry's future, while others grappled with the ghosts of its past. Here are the companies, technologies and trends that soared or sank in 2016.
About a year ago, Retail Dive came away from the National Retail Federation’s Big Show with one major prediction influenced by conversations with analysts and other industry experts: 2016 would be the year brick and mortar faced a shakeout.
While many retailers have rolled out cost-cutting measures to hold on to their stores, turnarounds, bankruptcies and closings have indeed dominated headlines this year. Other retail companies, technologies and trends sank as well — but still others soared.
Here are the retail industry's biggest winners and losers in 2016.
Winner: Off-price retail
Amid a transformative period for physical retail, in which e-commerce giant Amazon and other online players continued to eat into traditional brick-and-mortar retail sales, off-price retail has been consistently strong. A report published this summer showed that two-thirds of consumers shop at off-price stores, with shopping activity growing by 4% over last year, according to NPD Group’s Checkout Tracking, which measures consumer buying behavior.
“Off-price retailers have continued to outperform in the apparel space,” Christina Boni, Moody’s vice president and senior analyst, told Retail Dive. “TJX [parent company of off-price units T.J. Maxx and Marshalls] continues to be the leader in terms of that space overall. We anticipate healthy robust growth and the consumer is still fixated on value. We don't anticipate that will change in 2017.”
TJX has fared significantly better than department stores thanks to its enticing “treasure hunt” atmosphere, which blends higher-end, name-brand goods with lesser-known brands. The retailer reported better than expected third quarter sales and earnings, with revenue for the quarter rising 6.9% to $8.29 billion. TJX CEO Ernie Herrman trumpeted the positive results with a prediction that the company is on its way to becoming a $40 billion-plus company — an ambition that may not be out of the question.
“TJX has premier relationships with vendors and a focus on finding best product for stores. They continue to work on having the right product and the right categories in stores,” Boni said. “They continue to grow the business not only in the U.S., but internationally.”
Despite indications that the strong dollar is weakening TJX's overseas performance as well as its holiday expectations, TJX’s position is secure, Håkon Helgesen, Conlumino retail analyst, told Retail Dive in an email earlier this year. “In our view, while growth may come down slightly, TJX will end this year on a winning note. Its business model remains relevant and robust.”
Loser: Department stores
Department stores have long been closing poorly performing physical retail locations as part of turnaround efforts that focus on nurturing an online presence that can compete with Amazon. Macy's, Sears, Kohl's, J.C. Penney and Dillard's have collectively shuttered a total of 700 stores since 2013, according to a report from RBC Capital Markets released in September, and Macy's announced in August it will close another 100 full-line stores by early 2017.
“Let me tell you the problem," Robin Lewis, CEO of retail strategy publication The Robin Report and a former executive at VF Corp. and Women’s Wear Daily, told Retail Dive. "[O]ver the past several years, the capital investments [retailers] must make in technology and omnichannel buildout is so enormous and on the other side of it what you have is because we are such an over-stored world, the only way they can find growth is through insane price promoting. It is dragging all of them down. When you have capital investments going up like a rocket and prices plunging at the same rate, profits do as well.”
There likely will be more store closures to come. America currently has about 1,100 enclosed malls, but Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, said that number should be around 700. “The top 250’ll do fine, and the rest of them are going to struggle,” he noted earlier this year on CNBC’s “Squawk Box.” Kniffen also predicted e-commerce sales will reach 50% of apparel sales in a dozen years or so; moreover, Amazon is poised to dethrone Macy's as the biggest apparel retailer sometime next year.
"Outlet store expansion is suicidal. The Rack is going to be the new Nordstrom, and that is going to be it. It's a race to the bottom.”
CEO of The Robin Report
That leaves anchor department stores and malls scrambling to figure out how to leverage their real estate. Many retailers this year turned to outlet models in hopes of boosting profits, leveraging the success of off-price units like T.J. Maxx. Both Nordstrom and Macy’s are bolstering their respective off-price units, Rack and Backstage. However, Lewis says their plan backfired on their flagship brands.
“Outlet store expansion is suicidal,” he said. “The Rack is going to be the new Nordstrom and that is going to be it. It's a race to the bottom.”
It’s no secret that Amazon had another blockbuster year: Sales in its most recent quarter were up 29% year over year to $32.7 billion, thanks to the runaway success of the Prime Day shopping event’s second year and healthier back-to-school sales than many others in the industry.
Amazon has also been leading the way during the all-important holiday shopping season. Between Black Friday and Cyber Monday, Amazon accounted for 30.9% of total revenue and was ranked as the most visited online retail property on Cyber Monday, according to research from comScore.
“Amazon of course is beating the crap out of everyone,” Lewis said. "Amazon is at eight or nine on a one-to-10 scale, and the rest of the industry is at one or two."
“Amazon keeps growing. They’re compounding double digits. Unless they start getting sloppy and careless, it doesn't have any boundaries,” Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, told Retail Dive. “Customers are perfectly happy to buy just about everything from them, and they are increasingly more viable for wholesale retail, and they always pay their bills.”
It’s been a transformative year for most department stores, but most analysts agree Sears in particular is teetering on the brink of an inevitable bankruptcy.
This summer, parent Sears Holdings announced it would close 68 Kmart and 10 Sears stores by the end of the year: Despite a $300 million August loan from CEO Edward Lampert's hedge fund, the company said a month later that Kmart stores in at least 13 states would also shutter. Subsequent turnaround efforts have done little, and on Dec. 8 Sears posted its 20th straight quarterly decline, signaling it would further accelerate the closing of unprofitable stores to combat declines.
“Sears has never had a turnaround strategy. It doesn't have one now.”
Director of retail studies at Columbia University's Graduate School of Business
Sears CFO Jason Hollar said the company now plans to sell off its Kenmore, Craftsman and DieHard brands and its Home Services business, and reduce the investment in underperforming merchandise categories. But Cohen dismisses the notion those efforts can save the retailer. “Sears has never had a turnaround strategy. It doesn't have one now,” he said.
Sears was downgraded in September by Moody’s Investor Service, which slashed its rating to SGL-3 from SGL-2. “The new rating reflects the likelihood Sears will continue to need outside financing to stay in business, and that it may require covenant relief in order to maintain orderly access to funding lines,” the report stated.
“Sears continues to suffer and continues to have significant operating losses,” Moody’s Boni said. “With respect to the business, online is challenging and bottom-line results prove that they are not running the business on a positive cash flow basis and a gap has been reduced but it has a significant way to go before the business is self funding. To that effect, they continue to rely on external capital, whether it be alternative assets or terms of financing to meet the shortfalls in the business.”
Winner: Artificial Intelligence
In an effort to keep up with the likes of Amazon and enable better interactions with customers, more retailers this year adopted emerging technologies to bolster their multichannel strategies. The runaway leader was artificial intelligence, which has played a role in everything from chatbots and virtual shopping assistants to visual search in mall directories.
AI platforms such as Amazon’s Alexa virtual assistant, which powers its voice-activated Echo and Dot devices, allow customers to experience shopping without visuals. While many consumers may still want the “touch and feel” of buying a variety of products, Amazon has helped foster a market where customers prefer making casual conversation to add items to a shopping list. Alexa devices have been a hot holiday seller: As of mid-December, the Echo was sold out except in Amazon’s brick-and-mortar stores and on some rival retailer channels.
The importance of AI was also apparent in the multitude of retail acquisitions of AI-based companies. Etsy, for example, picked up Blackbird Technologies, a company with artificial intelligence and machine learning technology capable of improving site search and product recommendations for e-commerce sites. Meanwhile, eBay lost a key AI executive to Amazon.
Chatbots in particular have been an AI boon for the retail industry. In April, Facebook unveiled a suite of support functions for chatbots on its Messenger platform, driving more than 11,000 chatbots to join since then. In November, the social media company began allowing retailers and brands to buy targeted newsfeed ads that link directly to their bots, essentially allowing them to immediately initiate conversations with users clicking through.
Sephora has fully embraced chatbots, launching a Virtual Artist chatbot earlier this year. More recently, the beauty chain began allowing customers to book appointments for makeovers at its stores and use a Color Match service to virtually try out shades of lipstick in its inventory. Similarly, eBay in October rolled out a personalized shopping assistant, known as ShoptBot, on Facebook Messenger. The bot, which learns how to meet consumer demands on the job, helped provide gift ideas mapped to personality types such as the “Tech Obsessed Dad,” “Active Moms” and “Bohemian Girlfriends.”
As retailers increasingly aim to tailor unique experiences to digital-first customers by building conversations and relationships, AI will certainly become more important in the new year.
About a year ago, many analysts and industry onlookers (Retail Dive included) predicted that 2016 would be the year that location-based beacons with Bluetooth Low Energy became an almost essential way for retailers to communicate with shoppers via mobile application. Such technology held promise that retailers could implement hypergranular marketing initiatives directed at customers standing in specific aisles, in which case they could provide store maps, alert customers to special deals and offer product information.
A July 2015 report from BI Intelligence estimated half of all U.S. top retailers were testing beacons and anticipated the technology would influence some $40 billion in U.S. retail sales in 2016. But claims of “The year of the beacon” fell flat. In November, Brent Franson, CEO of engagement and analytics solutions firm Euclid Analytics, declared beacons to be dead.
“The use case is far too advanced for consumers,” at least for now, Franson told MarTech Today. Essentially, Franson said, beacons are a solution to a problem (and a consumer behavior) that the industry has not yet experienced, and may not experience for another decade or so until a significant portion of customers become accustomed to using specific retail apps to guide their in-store experience — for example, accessing store maps or checking for coupons or product demos.
Macy’s, Lord & Taylor, Urban Outfitters, and Kohl’s are among major stores that have announced trials of beacons, yet retailers have kept quiet about their results in recent months. Franson noted in his interview with MarTech Today that many of his clients are using them to test “stores of the future,” are still in a very experimental phase, “and a lot of experiments are failing."
Winner: The evolution of e-commerce
E-commerce was huge this year. Online sales soared to new heights this Black Friday, reaching a record-shattering $3.34 billion, up 21.6% from last year, according to Adobe Digital Insights. Additionally, Amazon's midsummer shopping holiday, Prime Day, was its biggest day of the year, proving that online retailers can redefine and outshine the parameters of the traditional holiday shopping season.
E-commerce brands who sell products across international borders enjoyed a particularly successful 2016, says Lila Snyder, president of global e-commerce at Pitney Bowes. “There’s been a shift toward more specialty, more unique, which tends to favor smaller and medium-sized retailers who are offering something different,” she told Retail Dive.
"The focus is on being quicker and softer and improving your supply chain."
Moody’s vice president and senior analyst
Brands that have leveraged their online and mobile channels to meet consumer demand for more immediacy were also big winners, especially in the apparel sector. "The focus is on being quicker and softer and improving your supply chain such that you are 'buy now' and the product is as fresh as it can be, and I think different retailers are in different stages of being able to provide that," Boni said. "The fast-fashion retailers do the best job at that."
This year upscale brands like Tommy Hilfiger, Michael Kors and Burberry made efforts to roll out "see now, buy now" concepts by speeding up the time it takes for the latest fashion styles to be available for purchase. In a September fashion show, Tommy Hilfiger made the collection instantly available on its website and at 300 stores worldwide. The brand is moving toward what it calls a “consumer schedule,” stating its spring/summer 2017 collection will also be immediately available in stores.
"This is a time when the consumer is really demanding what he or she wants, and when they want it," Hilfiger told The Business of Fashion in September. "They want instant gratification. They don’t want to wait six months."
Loser: Pure-play e-commerce
Michael Preysman, co-founder and CEO of startup e-commerce retailer Everlane, in 2012 famously told The New York Times’ T fashion magazine, “We are going to shut the company down before we go to physical retail.” This year, that promise crumbled.
In October, Preysman told attendees of the Fashion Tech Forum that the pure-play e-commerce retailer is mulling a move into brick-and-mortar retail. "There is a set of customers that wants to touch product before they buy it, and that's not something that we can change, no matter how much social media we do,” Preysman said, according to Fashionista. “So we are thinking about [physical retail]. We’re looking at it, and that’s all we can say at the moment."
“[Retailers] have to figure out how to create congruence between their online business and physical business."
Director of retail studies at Columbia University's Graduate School of Business
Everlane is far from the only e-commerce darling to begin dabbling in physical spaces. Similar pivots have been made this year by Warby Parker, Bonobos, Casper, Birchbox, Rent the Runway and even Amazon, in hopes that physical stores can boost sales and brand recognition. “The internet piece is a novelty,” Cohen said of pure-play e-commerce retailers, adding that companies like Rent the Runway won’t survive without showrooms or physical locations.
“If you're a young woman, you’re not sure what’s going to fit, so you order three dresses and return them all. Considering the economics of that, they haven't made any money,” Cohen said. “Showrooms work where the customer can’t comfortably buy something sight unseen.”
Nearly 80% of Americans today are online shoppers, a recent Pew Research Center survey found, but 64% still prefer buying from physical locations. Americans aren't alone. In an October letter to shareholders, Alibaba Group Holding CEO Daniel Zhang said the Chinese e-commerce behemoth is planning to integrate brick-and-mortar stores with its online operations to overcome the “tremendous challenges” inherent in pure-play e-commerce.
Increasingly important will be blending online and mobile components with physical retail, to deliver a seamless multi-channel experience. “[Retailers] have to figure out how to create congruence between their online business and physical business. The store has to feel like the website, the website has to feel like the store,” Cohen said. “Delivering excellence however you do business is a real imperative, and there have been so many people who have been so mediocre.”
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