Is It Safe To Buy Retailers Again? (XRT)

From Zacks: Change seems to be the only constant for the retail sector, which is undergoing a major transformation owing to shifting consumer preferences. While the overall outlook for the sector has been rosy following a spectacular holiday season, retailers may still have some challenges to face.

Innovation is a key factor that drives the retail sector today. Retailers continue to seek ways to find a place in customers’ shopping carts by reinventing, reviving and refreshing their business models. Further, the phenomenal rise of Amazon (AMZN – Free Report) and consolidation in the sector continue to be tough on retailers.

In 2017, the industry saw widespread closing of retail outlets, large number of bankruptcy filings and a few attention-grabbing acquisitions. Interestingly, we saw some big names like Wal-Mart (WMT – Free Report) and Target (TGT – Free Report) pursue the buyout of smaller e-commerce and direct-to-consumer brands to keep up with Amazon. Additionally, Amazon’s takeover of Whole Foods had been dominating the headlines last year. Also, grocer Albertsons Companies’ proposal to buy distressed drugstore retailer Rite Aid Corporation (RAD – Free Report) is the latest M&A activity to pull focus.

Clearly, retailers’ mantra “Everything Everywhere” is here to stay. Companies are adapting to the changing retail landscape and investing heavily in digital commerce and omni-channel. Further, retailers taking a customer-centric approach, providing a sense of personalization to enhance customer experience, can help them stay ahead of the game.

Apart from these challenges, players in the sector continue to face economic bottlenecks like a relatively strong U.S. dollar, volatile commodity costs and global uncertainty. Additionally, natural calamities like hurricanes had a slight impact on the performance of retailers.

This clearly shows that the Retail-Wholesale sector is no longer a bed of roses. Some issues troubling the industry are elaborated below:

Online vs. Offline Issue: The rise of omni-channel retailing has raised consumer expectations and simultaneously problems for retailers. Today, retailers must provide a blend of online and offline experience to engage customers. Moreover, along with an impressive product assortment, pricing, shipping, returns and promotional offerings, it is necessary to introduce personalized customer services in order to satisfy consumers.

To adapt to the omni-channel model, most brick-and-mortar retailers are now investing huge sums to improve digital and e-commerce. Further, they are vying to enhance value chain by improving supply chain and distribution. This should considerably help brave competition from online biggies like Amazon.

Meanwhile, pure-play online retailers face problems in converting a browsing customer into a buyer. Consequently, e-tailers are now coming up with physical stores to attract customers. These stores will serve as a hub of advertising for making purchases on site. Additionally, huge logistics costs in shipping products to customers as well as returns are major constraints for online retailers.

Customer Experience/Personalization: Customers are no longer satisfied with the traditional endless aisles and spending long time to find products. Consumers nowadays look for an enhanced experience at the stores. They look for product engagement, personalized experience and engaging in creative sight, smell, touch and taste. This is made possible by adopting virtual reality, showrooming and other experimental retail strategies to improve in-store customer experience.

Well, here we can take the example of NIKE Inc. (NKE – Free Report) , which has been offering personalized services like customized sneakers on customer request and the like. However, this level of personalization is not feasible for smaller firms. These firms instead bank on ideas like targeting customers with products tailored according to their preferences based on past purchases, or using location-based technology such as beacons to push personalized offers to customers’ mobile devices. These tactics may help satisfy customers’ sky-high expectations.

Maintaining Efficient Workforce: In the retail industry, where a salesperson is more like an asset than staff, recruiting disciplined workforce and maintaining productivity is difficult. Retailers generally find it challenging to find good staff in the first place, and even if they succeed, retaining them is quite a task.

Further, an improving economy has opened up more employment options and hence the pressure of maintaining a pleasant work environment with competitive wages and scheduling is high.

Efficient Supply Chain Management: This involves ensuring that the products reach stores on time. Maintaining an efficient flow has been a major challenge for retailers as disruption in supply of products due to miscommunication, changes in requirements or any unavoidable situation is common. This roils retailers’ business with empty racks and costs dollars.

An example of this situation is when a customer sees empty shelves after a promotional advertisement. While the customer will only be disappointed on not receiving the product, the retailer will be penalized for such an act and not be allowed to run the promotion further despite all the money spent on the advertisement.

Privacy: In an era of increased data breaches due to the rise of online and smart pay options,there is a need to balance out between the risks and security while dealing with customers. Retailers have to build customer relationships based on trust, engagement, affinity, desire and delight. Companies must adapt to the approach of addressing privacy needs of individual customers based on their risk appetite.

Today, digital wallets are replacing the traditional and slow legacy payment systems. There has been a transformation in the payment processing systems as customers prefer the no line, on-demand, or prepaid (online) options of completing in-store purchases. Not adapting to these latest technologies for payment will result in losing a large chunk of the customer base.

A Highly Promotional Environment: The retail industry is exceedingly competitive. To deal with this, retailers resort to excessive and often unplanned promotions that can largely impact sales and erode margins. In the past, this was common during the holiday season, when retailers proffered huge discounts and offers to meet short-term top-line targets and steal share from competitors.

However, now we are in the world of constant commerce, which requires lucrative offers no matter how, when and on what one shops. In general, the increased use of such promotions comes at a price, usually strained margins, especially as consumers today are unwilling to pay the full price for products.

Bottom Line

As you can see, survival is tough in the evolving retail space, particularly as Amazon steals the majority of market share. However, retailers vying to stay on should be ready to cover the shortcomings and treat the threats as opportunities.

In a nutshell, online retailing is a major growth driver in the retail industry. Retailers that balance physical and online presence are here to stay. Altogether, retailers providing smooth shopping experience, online or in-stores, with seamless payment solutions are likely to gain market share. On the contrary, retailers that have been slow to invest and still rely on traditional marketing methods are bound to suffer.

Check out our latest Retail Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

The SPDR S&P Retail ETF (XRT) closed at $45.31 on Friday, up $0.46 (+1.03%). Year-to-date, XRT has gained 0.29%, versus a 0.83% rise in the benchmark S&P 500 index during the same period.

XRT currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #25 of 39 ETFs in the Consumer-Focused ETFs category.

This article is brought to you courtesy of Zacks Research.