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Rodney Johnson: Time For Retailers to Panic?

Companies / Retail Sector Feb 02, 2016 - 02:53 PM GMT

By: Rodney_Johnson

Companies By most accounts, holiday retail sales were a letdown. While retail sales climbed 3.3% over November and December, stores reported a 6.4% drop in foot traffic. So even though people might have spent a bit more, they were choosy in where they spent.

When customers spend less, companies earn less, affecting the bottom line. This relationship is on display at companies like Macy’s, which warned that sales were off 4.7% in November and December. The company plans to close stores and lay off thousands of workers. The same story is unfolding at Gap.

However, the pain isn’t equally distributed. L Brands Inc. – owner of Victoria’s Secret and Bath & Body Works – had the best December ever. The differences in what these retailers sell explain the disparate outcomes, and favors another company I haven’t mentioned – Amazon.

I love the Macy’s location on the lower east side of Manhattan. The historic store covers city blocks, and even after the recent renovation it has wooden escalators. It seems like the goods on display go on for miles.

But among the racks lie the source of Macy’s woes. They sell a lot of coats. And scarves. And gloves.

On Christmas Day the temperature in New York City reached 66 degrees, making it the warmest Christmas on record. The current El Nino weather system has been pumping moisture across the U.S., and until early January had kept cold weather systems at bay in Canada. The moderate weather during the holidays found people in New England spending time outdoors in shorts, and not very interested in buying cold weather gear.

Warmer than normal temperatures were expected, but not that warm! The weather caught Macy’s and other large clothing retailers off guard, and with a bunch of unsold inventory.

It’s not that consumers weren’t buying, to which Victoria’s Secret can attest. They just weren’t buying what a lot of major stores had to offer.

Which brings me to Amazon.

For years consumers have been migrating to online shopping. The move was expedited by high-speed Internet (remember the dialup modem sound?), which made browsing faster, and allowed sellers to offer more efficient fulfillment and return procedures.

On Black Friday weekend, brick-and-mortar stores experienced a 10% decline in sales, while online sales grew by 10%. Now, sales at physical stores are still about nine times the size of online sales, so the absolute dollar amounts don’t cancel each other out, but online sellers started their holiday offerings weeks before Thanksgiving. This allowed them to capture more sales sooner than physical stores, which had to wait for delivery of holiday items.

And then there’s the matter of what they sold.

Physical stores are limited by what they have on hand, whether it matches the temperature outside or not. Online, shoppers can browse for whatever they want, even at 2 a.m. on a Sunday.

This trend toward e-commerce, along with the sudden shift in weather-based demand, is music to the ears of online retailers, and no one in that category is happier than Amazon.

The e-commerce giant has branched out in recent years, introducing its Prime membership with free shipping, Amazon video and music streaming, and cloud computing for storage. But the main reason most people visit the site is to buy stuff. And boy, do they buy stuff!

Over the holiday season, Amazon accounted for 42.7% of all online sales.

Think about that for a second.

One company handled almost half of all Internet sales for the entire country. How’s that for reach? In fact, Amazon captured more sales than the next 10 closest online retailers combined, including Best Buy, Apple, and Walmart.

What’s more, the company doesn’t make many things. It’s typically a pass-through for other people’s stuff. If more buyers want swimsuits than parkas, who cares? Sell ‘em what they want!

Amazon’s ability to offer us millions of goods, and then put them in our hands within a day or two – sometimes the same day – without having retail locations is nothing short of a technical marvel.

The company is a bundle of Internet expertise, marketing savvy, and logistical prowess. They are giving us what we want, when we want it, and we’re rewarding them for it with astronomical sales.

They’re also destroying other companies in the process. Macy’s, Gap, Kohl’s, even Nordstrom are all feeling the heat from a competitor they can’t touch, can’t match, and can’t catch.

Those that can’t adapt to the new way of doing business will shrink. Earnings will fall as efficiencies drive down costs, allowing consumers to keep more of their dollars in their pockets.

As for Amazon, their global domination continues.

The company reports earnings on Thursday. I have no idea what they will report. Since inception, they’ve plowed almost every earned dollar back into growth, not focusing on profits. If the goal was to own their space and become synonymous with online spending, they’ve achieved it!


Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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