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Trends Causing Retailers To Struggle (JCP, M)

Author: Daniel Davis

The health of the retail industry is usually tied to that of the overall U.S. economy. According to a PricewaterhouseCoopers LLP study, retail is the largest private employer in the United States. Retail directly and indirectly supports 42 million jobs, provides $1.6 trillion in labor income and contributes $2.6 trillion annually to U.S. GDP." Consumer spending on retail items like durables (i.e., washing machines and refrigerators), semi-durables (clothing) and nondurables (such as food items) is the economy's lifeblood, to the point where some economists favor boosting consumer spending as a remedy for a sluggish economy.

However, recent trends have been an exception to this trend. While the U.S. economy appears fairly stable today, the retail industry is not. Thousands of stores and outlets have been shuttered by such national chains as J.C. Penney, Barnes & Noble (BKS), Macy's (M), Nordstrom (JWN) and the now-bankrupt Deb Shops, among many others.

The Key Reasons

One reason is that retailers are increasingly at the mercy of what seems to be irrevocable cultural trends, within and outside the retail industry. Here are some major causes of the industry's woes.

  • Online Shopping

Smart phones and tablets are becoming the new storefronts. Buying online allows customers to choose from a wide range of products that are usually always in stock, at whatever time they want and from the comfort of their homes, workplaces or even cars. So now people enjoy shopping at midnight while sitting on the couch, no longer having to contend with rush hour traffic to reach a store during its ‘open' hours.

The growth of online shopping has severely hit brick and mortar stores and has left many formerly top retailers at a loss, as the majority haven't been able to adapt as yet. A substantial drop in mall traffic has sunk profits, to the point where keeping stores open no longer seems financially viable. The worst-case scenario has occurred again and again: former retail giants Borders, Tower Records and Circuit City have all collapsed, shuttering all stores and filing for bankruptcy.

J.C. Penney Co Inc. (NYSE: JCP) is still deep in the struggle. Where the company's share price topped $43 in February 2012, it's now trading at just above the $8 mark. Its revenues have been sapped by its retail store legacies: high maintenance costs are eating away at profits. By contrast Macy's has been more adept at moving into e-commerce, making its in-store and online business work together in combination. Though Macy's is shrinking the number of its brick and mortar stores, its revenues have grown and it currently trades at $58 a share. (For more, read: Macy's Using Same-Day Delivery to Fend off Rivals.)

  • Shrinking Surplus Income

Another reason for retail's troubles is that customers simply don't have as much money as they once did. According to an analysis by Enterprise Community Partners in the MailOnline, more than one in four Americans are spending at least half of their family income on rent - leaving little money left to purchase groceries, buy clothing or put gas in the car." About 11.3 million households devote half or more than half of their income on utilities and housing, while about 1.8 million households spend 70% of their income on rent. So at the end of the day, the average middle class U.S. household isn't left with much disposable income, and has little inclination to spend it at inconveniently-located stores with set hours. (For related reading see: What's Holding Back the U.S. Consumer.)

Trying to Adapt

Given these factors, retailers are struggling to make their businesses more compact and financially viable. In many cases, this means abandoning stores at locations which no longer have a neighborhood population to justify their day-to-day operating costs. Downsizing such locations will help stores divest themselves of these legacy costs, with any savings diverted into upgrading their technology and distribution capabilities.

The Bottom Line

While retailers are aggressively downsizing, this doesn't necessary portend their irrevocable fall. Done well, downsizing can make the retailer more efficient, emerging with a compact group of stores that have lower operating and management costs. Retailers are shifting to omni-channel retailing, creating a seamless shopping experience by combining in-store, online services and more. Omni-channel retailing is based on an order management system which, according to a white paper by UST Global is an intertwined network of various systems that give a single integrated view to both the retailer and the customer." While the front end is the retailer's public "face," "the back-end systems are the backbone that supports that value. (For related reading see: The Industry Handbook: The Retailing Industry.)

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